Florgale Uniforms Pty Ltd (rec & man apptd) (in liq) v Orders [2004] VSC 65

2. In this proceeding, certain corporations (now in liquidation), and the related companies and individuals who secured or guaranteed the payment of their liabilities to the National Australia Bank ("NAB") pursuant to a number of debentures, seek relief against the NAB and Mr Malcolm Orders, the receiver and manager it appointed pursuant to the debentures.

5. The plaintiff corporations conducted a business of manufacturing health industry apparel, linen, sporting apparel and corporate uniforms. They allege that the receiver breached his duty pursuant to s.232 and s.420A of the Corporations Law in realising specialised stock by auction, rather than by sale to the existing customers of the business. They further allege that the NAB is liable for aiding and abetting the receiver's breach, or because the receiver was its agent in relation to the relevant conduct. Stock valued at approximately $2 million in the Florgale Group's books, which had an estimated auction realisation value of approximately $337,000 was sold for approximately $100,000. The plaintiffs argue that, but for the breaches of duty, the corporate apparel stock alone would have raised over $800,000, and there would have been a sufficient surplus from the realisation of the corporations' assets to discharge the debt of approximately $1 million owed to the NAB, without recourse to the guarantees and mortgages. The NAB, by counterclaim, seeks judgment against the guarantors and mortgagors for the amount of the Florgale Group's debt and seeks to apply the proceeds of sale of the mortgaged properties to its reduction.

8. The plaintiffs originally alleged four specific instances of breach of duty in realising the companies' assets. They were: forfeiting the opportunity to sell the business as a going concern; failing to accept an advantageous offer, made prior to auction, to purchase certain stock before the offer was withdrawn; the nature of the sale of a particular lot of garments (the VCFL shorts); and conducting a sale by auction of the stock, materials and work in progress.

11. At the commencement of trial, the issues in dispute were reduced. The plaintiffs abandoned the claim based on failure to sell the business as a going concern (hitherto their principal claim) and the claim based on the sale of a specific lot of garments (the VCFL shorts). The plaintiffs, by leave, filed and served a further amended statement of claim dated 9 February 2004, which reflected the reduction of their claims.

15. The first plaintiff, Florgale Uniforms Pty Ltd ("Florgale Uniforms"), the second plaintiff, Florgale Uniforms NSW Pty Ltd (receiver and manager appointed) (in liquidation) ("Florgale Uniforms NSW") and the third plaintiff, Professional Uniforms Pty Ltd (receiver and manager appointed) (in liquidation) ("Professional Uniforms") are all companies in liquidation, with a receiver and manager appointed.[1] They collectively constitute the "Florgale Group".

18. The fourth plaintiff, Group Textile Enterprises Pty Ltd ("Group Textile") is and was the trustee of the John W Burnes Family Trust. Group Textile was the registered proprietor of a property situated at 5A Union Street, Brunswick ("the Union Street property"). The Union Street property was one of the properties from which the Florgale Group's business was conducted.

21. The fifth plaintiff, Thurston Nominees Pty Ltd ("Thurston") was the registered proprietor of a property situated at 11 Little Gold Street, Brunswick ("the Little Gold Street property"). The Little Gold Street property was also a property from which the Florgale Group's business was conducted.

24. The Union Street property was sold on or about 3 March 1999. The net proceeds of sale were $346,648. The Little Gold Street property was sold on 19 March 1999. The net proceeds of sale were $155,013.82.

27. The proceeds of sale of the properties were deposited in a NAB account. The disposition of the fund is dependent on the outcome of this proceeding.

30. The sixth plaintiff, Mr John Burnes, was the managing director of the companies in the Florgale Group and of Group Textile and Thurston. In 1989, he executed a personal guarantee of the liabilities of the Florgale Group companies under a finance facility granted by the Bank of New Zealand in January 1989 ("the BNZ finance facility").

33. The seventh plaintiff, Mrs Colette Burnes, is the former wife of John Burnes. In 1989, she executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

36. The eighth plaintiff, Mr David Burnes, is the brother of John Burnes. David Burnes was a director of certain companies in the Florgale Group and of Thurston. He was the general manager and production manager of the Florgale Group. In 1989, David Burnes executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

39. The ninth plaintiff is the estate of Ms Constance Mary Ryan, deceased. In 1989, Ms Ryan executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

42. The tenth plaintiff, Mrs Elizabeth Burnes, is the wife of David Burnes, who, in 1992 executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.

45. The first defendant, Malcolm Orders, is a chartered accountant, registered liquidator, official liquidator and insolvency practitioner who, on 5 November 1998, whilst a partner of the firm Bird Cameron Partners ("Bird Cameron"), was appointed receiver of the companies in the Florgale Group.

48. The second defendant and plaintiff by counterclaim, the NAB, in 1992 succeeded to a number of debenture charges granted by companies in the Florgale Group, and to mortgages granted by Group Textile and Thurston in favour of BNZ in 1989 to secure financial accommodation granted by BNZ to the Florgale Group.

54. The plaintiffs' principal contention was that the receiver breached his duty by conducting a sale of the stock by auction on 15 December 1998, rather than selling it by conducting a large-scale "closing-down" sale targeting the Florgale Group's existing customer base.

57. The plaintiffs' closing written submissions relevantly state:

"The principal aspect of the plaintiffs' case in relation to the sale of assets is therefore in relation to the manner in which the stock of the company - made up garments, fabrics, work in progress was realised. The plaintiffs' case in this respect involves two principal contentions. First, a primary case that from about mid-November 1998, the receiver should have given consideration to affirming the stock to the existing customer base of the company, at discounts from the usual wholesale prices, and the receiver should not have immediately decided simply to sell the stock at auction. The stock of the Florgale Group was special purpose stock - including corporate apparel - which has a quite different market to general fashion garments. This should have been clearly apparent to Mr Orders, given his prior experience with the group in relation to the Quick Evaluation Report, and the advice given to him by the directors of the group as to the special nature of their stock. For stock of this nature, the existing customers would, as a matter of common sense, quite obviously be willing to pay a higher price than general purchasers at auction, and this has been borne out in the evidence of former customers of the Florgale Group. It is also clear that sale of stock of this nature by auction is universally regarded as the option of last resort, which will realise less than other methods of sale."

61. The plaintiffs thus argued that the best method of disposal for the Florgale Group's special purpose stock (assuming that the Florgale Group's business could not be sold as a going concern) was to approach the existing customer base. In support of that contention, and their claim for loss and damages, they called a number of former customers as witnesses, in order to establish that there was a demand amongst existing customers for the auctioned stock, which would have led to significant purchases and a better net return if a closing-down sale at a discount had been conducted.

64. Mr Collinson, counsel for the plaintiffs, argued that the receiver should have conducted a large-scale closing-down sale at a discount to existing customers, rather than proceeding directly to auction. He argued that the failure to conduct a closing-down sale was the result of an antecedent breach in "process", in that Mr Orders did not conduct any or any proper analysis of the different options available for disposing of the stock for the best price possible. The plaintiffs argued that instead, Mr Orders first concentrated on the sale of the business as a going concern and, upon the failure of that aim, immediately decided to sell the stock by auction. They argued that Orders' failure to undertake the analytical process required of a receiver was evidenced by his failure to prepare any budget or documentary analysis comparing the likely costs and benefits of an auction with the costs and benefits of conducting a "closing-down" sale aimed at the Florgale Group's existing customers.

67. Mr Collinson argued that the receiver should first have pursued the undisputed primary objective of selling the Florgale Group's business as a going concern concurrently with a concerted strategy of sales at a discount to existing customers. However, conceding that there may have been some tension between the two objectives, he argued in the alternative that upon the failure to sell the business as a going concern, the receiver should have considered and adopted the strategy of mounting a large "closing down" discount sale of the entire Florgale stock to the existing customers. Further, the receiver should have prepared a spreadsheet analysis comparing the likely costs and benefits of a closing-down sale to those of an auction.

70. The plaintiffs ultimately did not dispute that sales of stock occurred during the pre-auction period. However, they contended that such sales were merely "passive", rather than "pro-active" sales which were part of a concerted strategy.

73. The plaintiffs conceded that an auction of the Florgale Group's plant and equipment would have been necessary in any event, as would a smaller auction of any stock which was not sold to existing customers in the hypothetical closing-down sale. However, they contended that auction was the method of last resort for the disposal of special purpose stock, and should not have been adopted this case.

76. In support of the argument that a major closing-down sale to existing customers at a discount should have been adopted, and would have produced better results, the plaintiffs relied on

(a) the evidence of certain customers of their demand for Florgale Group stock, and their readiness to purchase it at a discount on wholesale price;

(b) the opinion evidence of Mr John Burnes on the returns he believed would have achieved from the strategy of a sale of the entire stock to existing customers within a six week period, at discounts recommended by him.

82. The plaintiffs contended that not only was an auction the wrong method of realisation, but that the auction ultimately conducted by Taylor Lockwood on 15 December 1998 was "prepared, advertised and conducted badly, so that the auctioned stock realised only a small fraction of what it was worth and what it would have realised had the auction been properly conducted." The plaintiffs complained that the advertising was confined to three states, although Florgale Group conducted a national business. Further, customers were not notified of the auction and stock was bundled into auction lots which did not contain a range of sizes and styles attractive to existing customers or purchasers of corporate uniforms.

85. It is undisputed that the receiver's primary objective, supported by the Messrs Burnes, was to sell the business as a going concern.

88. However, the plaintiffs contended that during the receivership Messrs John and David Burnes on various occasions warned and advised Orders or his staff-member Quin, that the Florgale Group's specialist stock should be sold to the existing customers and should not be sold at auction. They also contended that the Messrs Burnes expressed concern about the level of sales occurring during the trade-on period and prior to auction, complained of the preparation of lots and other arrangements for auction, and advised the receiver to remove corporate logos from logoed corporate uniform stock prior to sale. They claim that such advice was rebuffed on each occasion by Mr Orders or by Mr David Quin, a member of the receiver's staff who was more or less permanently present at the Florgale Group premises throughout the receivership during the period prior to the auction on 15 December 1998.

91. The Messrs Burnes gave evidence that the receiver or Quin responded to their complaints or recommendations by excluding them from discussions and or stating that the disposal of stock was none of their business. They testified that at the outset of the receivership, at a meeting on 5 November 1998, Orders expressly prohibited them from making any contact with customers or from concluding any sales at all without his written authority, and handed them a document to that effect.

94. The Messrs Burnes also testified that on subsequent occasions, John or David Burnes again urged that efforts be made to sell stock to customers, advised against auction, and protested at the bundling of the stock for auction, but that the receiver rejected the advice or recommendations.

98. Mr Garde, senior counsel for the defendants, submitted that the plaintiff's principal complaint concerning the method of disposal of stock was based on hindsight. It did not take account of the receiver's fundamental obligation to balance the costs of a particular mode of disposal against the likely returns, and to weigh all relevant risks, when determining the mode of realisation of assets. He argued that the ultimate goal of the receiver is, (subject to the general law and statutory duties owed to the mortgagor), to maximise the returns to the secured creditor. Although a higher sale price might be achieved by a particular method of disposal, the associated costs might outweigh it.

101. He submitted that I should reject the Messrs Burnes' testimony that during the receivership they complained of the receiver's approach to the sale of stock, advanced the proposal of a large closing-down sale at a discount aimed at existing customers and objected to the decision to sell the stock by auction. Similarly, he contended that I should reject their testimony that they complained of the level of sales of stock achieved prior to auction, the method of compilation of stock into lots for auction and the advertising and notification of prospective bidders for the auction. Mr Garde also submitted that I should not accept the Messrs Burnes' testimony that they advised that the logoes be removed from logoed corporate uniform stock.

104. Mr Garde argued that in so far as the plaintiff's case relied on the disparity between the amount realised at auction and the value ascribed to the stock in the Florgale Group's financial statements, it was fundamentally misconceived. The Florgale Group's practice of valuing the stock at wholesale prices less 20% was erroneous, because it included a profit component. Instead, the valuation method of cost of goods (if lower than net realisable value) should have been adopted in the financial statements.

107. Further, he submitted that the Florgale Group had been making losses and its revenue was declining for approximately five successive years. It had fundamental problems of excessive stock holdings with inflated book values. There was a pattern of increasing stock holdings, while the companies' operations were increasingly unprofitable. Those circumstances fortified the conclusion that the stock was overvalued in the Florgale Group's books.

110. There had also been unsuccessful efforts to sell the entire business for less than the value ascribed to the stock. By October 1998, the directors considered the Florgale Group companies to be insolvent. The appointment of administrators, and the subsequent appointment of a receiver, were public events, which rendered the realisation of stock more difficult. The trade knew of the Florgale Group's insolvency.

113. Mr Garde argued that the large closing-down sale discount aimed at existing customers proposed by the plaintiffs was entirely unrealistic. It ignored the trading history of the business both prior to receivership and during the receivership up to the closure of the business. The receiver had sold to existing customers at a discount but had sustained trading losses. Contrary to the plaintiffs' assertion, the remaining staff had continued to make sales at a discount both before and after the closure of the business, although the sales of items which required continuity of supply were reduced. The plaintiffs' proposal did not take account of the risks, the practical limitations and significant costs which would be entailed. By the time the receivership commenced, the administrator had already reduced the Florgale staff from 34 persons to about 17. The remaining staff would not have been capable of selling and despatching the Florgale Group's entire holding stock (which was equivalent to the quantity usually sold within the space of about a year) within a concentrated six week period. It would have been necessary to hire additional staff, and (depending on the time required to sell all the stock) to commit to additional rental for either the existing or alternative premises.

116. The defendants argued that in order to sell stock by the method of a closing-down sale at a discount to existing customers advocated by the plaintiffs, it would have been necessary to continue to run the business, which was incurring estimated losses of $43,000 from 11 November 1998 to end of November 1998. Because of the approaching end of year, the latest possible auction date for 1998 was 15 December 1998. If the auction did not take place then, it would have to be delayed until next February at the earliest. The losses of running the business over January and February, including rental, would then have to be funded. The Messrs Burnes, and other related parties, were not willing to cover any losses incurred by keeping the business open. The incurring of additional costs had to be assessed against the risk that the return would not justify them. A better outcome was not, in any event, guaranteed.

119. Mr Garde submitted that receiver engaged Taylor Lockwood, (an experienced and reputable firm of auctioneers previously retained by the voluntary administrator) to value the stock and to advise on the preparation and conduct of the auction. He accepted Taylor Lockwood's recommendations in relation to the timing, advertising and conduct of the auction. In particular, the receiver accepted Taylor Lockwood's advice for two substantial advertisements in "The Age" on successive Saturdays. There was no evidence to suggest that the entire customer base should be notified of an auction and the receiver had already instructed staff, including the Messrs Burnes, to contact existing customers who were likely to be interested in purchasing stock at a discount. Further, about 768 auction brochures or flyers were distributed to recipients across Victoria, New South Wales and South Australia. Although there were Florgale Group retailers and distributors listed in other states, no evidence or statistics established the proportion of its sales achieved outside Victoria, New South Wales and South Australia, other than for Mr John Burnes' estimate, based on the figures for a three month's period of operation. There was no basis on which to conclude that national advertising was warranted. Further, the auction catalogue revealed lots containing assorted sizes and styles, contrary to the plaintiffs' allegations.

122. Mr Garde ultimately submitted that the cost versus benefit analysis of the methods of realisation was a matter for the judgment of the receiver, which he had exercised on reasonable grounds in all the prevailing circumstances.

125. The defendants contended that the auction was well conducted and well-attended. There were 130 registered bidders and about 200 persons who attended. Thirty-two staff days by Taylor Lockwood staff were involved in the preparation and conduct of the auction. Two auctions were conducted within the day. The plant and equipment was auctioned first, followed by the stock. There was a large number of purchasers. Although the proceeds of the auction were significantly less than estimated, that was not due to any flaw in the advertising or conduct of the auction.

129. The plaintiffs' second claim is that the receiver breached his duty by failing to transmit an immediate acceptance of an advantageous but conditional offer made by Yakka Pty Ltd ("Yakka"), a competitor of the Florgale Group, to purchase specified Coles corporate uniform stock for $100,000. The Yakka offer was received late in the afternoon of Friday, 27 November 1998. The Yakka offer was stated to be open for seven days, but it was prematurely withdrawn on Monday, 30 November 1998. It was subject to conditions, including a physical inspection. The Coles stock was subsequently included in, and sold at, the auction on 15 December 1998. The plaintiffs' closing written submissions stated:

"The other aspect of the plaintiffs' case relates to the specific failure of the receiver to accept an offer from Yakka to purchase Coles stock. On 27 November, 1998, after the decision had been made to close the business, Yakka made a formal offer to purchase the Coles stock for $100,000. The stock had been given an auction realisation value of $6,879. Despite the fact that the price offered was over 14 times the auction realisation value, and the advice from John Burnes that the offer should have been accepted immediately, it was not, and the offer was withdrawn."

133. The defendants argued that in circumstances where there was no apparent urgency and the offer was subject to conditions, it was unrealistic to contend that the receiver breached his duty by failing to accept the offer within the space of a working day.

137. The plaintiffs' third claim is based on the conversion of certain computer equipment valued at approximately $4,000, held by Group Textile pursuant to a hire-purchase agreement, which was lost during the course of the receivership. The defendants accepted liability for the conversion, but contended that the damages were limited to the value of the goods. The plaintiffs contended that damages included the liability of approximately $18,000 under the hire purchase agreement pursuant to which the converted goods were acquired.

141. The Florgale Group conducted a family business of manufacturing and selling uniforms, business wear, sporting and health care apparel, and hospital linen. Originally it produced coats, but began to manufacture uniforms during World War II. The business then moved into hospital lines and apparel. Several years before the appointment of the receiver, the Florgale Group began to manufacture corporate uniforms, but it achieved only a "negligible" share of that market. It was not a retail business. It sold to large corporations directly, and also sold to a network of retailers. It had agents and distributors outside Victoria. Its customers included a number of hospitals.

144. The business operated in three related segments:

150. The purchase of corporate apparel entailed a taxation advantage to the purchaser, provided that the garments were capable of 3-5 years wear. The Florgale Group corporate garments were relatively long-lasting and did not become obsolete as quickly as ordinary fashion garments. It was not disputed that the corporate uniform stock had a narrower "niche" market than ordinary fashion garments.

153. On or about 30 January 1989, the Bank of New Zealand ("BNZ") granted financial accommodation to the Florgale Group, secured by the following:

(a) A debenture charge over the assets of, and an undertaking by, Florgale Uniforms.

(b) A debenture charge over the assets of, and an undertaking by, Florgale Uniforms NSW.

(c) A debenture charge over the assets of, and an undertaking by, Professional Uniforms.

(d) A debenture charge over the assets of, and an undertaking by, Group Textile.

(e) A debenture charge over the assets of, and an undertaking by, Thurston.

(f) A mortgage by Group Textile of the Union Street Property.

(g) A mortgage by Thurston of the Little Gold Street Property.

159. On or about 30 January 1989, each of the above companies and Australian Outback Travel Company Pty Ltd ("Australian Outback") (a travel business conducted by John Burnes' son) executed a cross-guarantee in favour of BNZ.

162. In January 1989, John Burnes, Colette Burnes, David Burnes and Constance Mary Ryan (now deceased) each executed a personal guarantee dated 30 January 1989, in favour of BNZ in respect of the Florgale Group facility.

165. On 7 August 1992, Group Textile executed a deed of undertaking in favour of BNZ.

168. On 17 August 1992, Elizabeth Burnes executed a guarantee and indemnity in favour of BNZ.

171. On 4 September 1992, the Florgale Group, Thurston and Group Textile executed a deed of subordination in favour of BNZ.

174. In February 1994, BNZ released Australian Outback from its obligations under the cross-guarantee dated 30 January 1989.

177. In July 1997, the NAB succeeded BNZ as lender and holder of the above guarantees and securities. It is not disputed that the NAB thereby acquired the benefit of all the guarantees and securities, the validity of which was not challenged.

180. By 1998, the Florgale Group was experiencing financial difficulties and liquidity problems. Its liability to the NAB was approximately $1 million. The market for health industry apparel had reduced, because hospitals no longer bought uniforms for staff, but left the purchasing to them. Similarly, the market for corporate uniforms had diminished, as corporations no longer purchased uniforms directly to provide cost-free to their staff, but left it to staff to purchase. John Burnes' son made an unsecured loan to the business of $250,000. In early 1998, John Burnes informed the Florgale Group staff that sales targets had to be met within the next few months or the business would be wound up or sold, as the Burnes family was not willing to continue to commit further funds.

183. In March/April 1998, the Florgale Group's funding arrangements with the NAB were due for review. The NAB was concerned about the continued provision of banking facilities to the Florgale Group. It instructed Mr Orders of Bird Cameron to investigate and report upon the Florgale Group.

186. In the course of discussions in March/April 1998, John Burnes provided Orders with information concerning the Florgale Group. Orders completed his review and prepared a report dated 9 June 1998 to the NAB ("the Quick Evaluation Report").

189. The main findings of the Quick Evaluation Report were as follows:

(a) The Florgale Group had incurred losses in the five financial years ending 30 June 1997, although there was a possibility of a small profit before income tax being made in the current year (ending 30 June 1998). The poor trading results were due to a trend of declining revenues from $10.7 million in the 1992/93 financial year to approximately $5.7 million in the 1997/1998 financial year;

(b) The Florgale Group did not prepare a business plan, and did not have a basic marketing plan;

(c) there was insufficient management control over growth in revenue of the Florgale Group;

(d) the trading losses and decline in sales revenue were due to the decline in the public health market, with hospitals no longer purchasing uniforms, but leaving it to their staff. The corporate uniform market, in which the Florgale Group had attempted to sell product over the past two years, was highly competitive. The Florgale Group had negligible market sales and had lost significant sales due to changes in corporate policy at Coles and Kmart. The corporate uniform market was also becoming more fashion-oriented;

(e) a number of creditors were refusing to supply goods to the Florgale Group until their accounts were brought within acceptable trading terms;

(f) the accounting systems were inadequate to provide standard profit and loss statements for each of the Florgale Group's divisions;

(g) there were no adequate strategies being implemented to increase sales;

(h) the NAB should not increase the level of its financial accommodation to the Florgale Group companies;

(i) the NAB should give notice to the Florgale Group companies to re-finance their debts;

(j) if the Florgale Group companies failed to refinance and the losses continued, a receiver and manager should be appointed to them;

(k) the Florgale Group had only been in the corporate uniform market for one to two years and was still attempting to develop a competitive advantage. The report stated: `Mr Burnes advised that Professional Uniforms Pty Ltd's market share is negligible. Mr Burnes advised that this market is becoming more fashion-oriented and more varied in the number and type of uniforms an employee may have';

(l) Mr Burnes estimated that the Florgale Group had a market share in health uniforms of 10% to 15% in Victoria and a market share of 15% to 20% in Victoria for linen. The market share for continence care products was 20% to 25%. (The report did not specify whether that market was confined to Victoria or not.) Sporting apparel was sold to the VAFA, the VCFL and a part of the New South Wales Football League;

(m) Mr Burnes was unable to advise of the key success factors for the corporate uniform division, because the Florgale Group was still attempting to develop a competitive advantage. Those factors should have been identified prior to entering the market;

(n) The Florgale Group had incurred significant losses in the past and trading results had been adversely affected by:

a declining market in health;

the declining overall market;

a declining market in corporate uniforms.

(o) Linen was not purchased in December and January, due to the holiday period. The sales of blouses and skirts declined in December and January, due to the holiday period;

(p) the lead-time to purchase linen was approximately three months. The Florgale Group held stock equivalent to approximately five to six months' sales in raw material and the area appeared to be overstocked;

(q) The corporate uniform stock represented approximately 5.58 months' of stock, and excessive stock levels appeared to be held.

195. At a meeting on 24 June 1998 attended by John Burnes, David Burnes, Orders, NAB officers and others, the NAB officers informed the Messrs Burnes that the Florgale Group's loan facility would not be renewed unless it retained an outside marketing consultant.

198. At the meeting, Orders recommended the appointment of Business Concepts Pty Ltd ("Business Concepts") as a suitable external marketing consultant. In his witness statement, John Burnes stated that Orders revealed after the meeting that he had an involvement in Business Concepts. John Burnes subsequently obtained quotations from Business Concepts and another marketing consultancy, on the advice of Mr Grey of Pitcher Partners. The Florgale Group ultimately retained Business Concepts. In cross-examination, John Burnes conceded that Orders did not say that he had any financial involvement with Business Concepts.

201. Although there appeared to be a suggestion that Orders' recommendation of Business Concepts was in some way improper, no impropriety was expressly alleged or established. There is no evidence to suggest that either Mr Orders or his firm, Bird Cameron, had any financial interest in the organisation, or would benefit in any way from its retainer. The Florgale Group chose to retain Business Concepts after having investigated alternatives and calling for quotations.

204. The plaintiffs contended that the Quick Evaluation Report exaggerated the rate of the Florgale Group's financial deterioration by inaccurately stating that revenues were declining. By a letter of 21 September 1998 to the NAB, John Burnes criticised the Quick Evaluation Report's reference to the sales of $10.7 million in 1992/3, which included $4 million worth of sales by Australian Outback, and "the 1992/3 revenue was $6,712K not $10,743K and the Nett loss $215K was abnormally affected by abnormal expenditure to close the Albury factory". The plaintiffs argued, however, that the Quick Evaluation Report establishes Orders' familiarity with the Florgale Group's business operations and the nature of the `special purpose stock', which should be taken into account when determining his liability.

207. At trial, Orders defended the reference to a trend of declining revenues in the context of a business which "was sitting on 12 months' worth of stock". He contended that the Florgale Group needed a substantial increase in revenue if it were to avoid insolvency.

210. Orders explained that he recommended in the Quick Evaluation Report that the Florgale Group be required to re-finance notwithstanding a debt of $1 million and net tangible assets valued at $3 million in the companies' books, because "It's a question of weighing up the risk profile of the business. This company was carrying an equivalent to about 12 months sales in stock at any point in time and it wasn't running that stock down. It needed to increase sales to run stock down. The risk is whether this company was capable of doing it ... ".

213. Mr John Burnes appeared evasive and inconsistent when cross-examined on matters included in the Quick Evaluation Report and the state of the Florgale Group business prior to the appointment of Pitcher Partners. He conceded that he had provided information to Orders for the preparation of the report. He agreed that the sales to hospitals were decreasing, but denied that the public health market of the Florgale Group was decreasing. At one point, he asserted that the decline in direct sales to hospitals was compensated for by sales to hospital staff. Ultimately, however, he conceded that the staff purchased less than the hospitals had previously purchased.

216. He agreed that the Quick Evaluation Report correctly stated that the Florgale Group had only a negligible share of the corporate uniform market and had lost sales because Coles no longer purchased uniforms for its staff.

219. Mr Burnes agreed that the Florgale Group faced the fundamental problem that its stock level of made-up garments was increasing year by year and that corporate uniforms were becoming more fashion-oriented. He conceded that the Florgale Group could not achieve any reduction in stock, which was absorbing more company money.

222. Mr Burnes was unresponsive to cross-examination on whether the Florgale Group companies were insolvent at the time of the appointment of the voluntary administrator. He did not answer the question and repeatedly stated that "in my view we needed to restructure".

225. At trial, Mr Burnes testified that he believed that the entire Florgale Group stock could have been sold within six weeks to existing customers at various discounts which would have produced total sales receipts of approximately $879,000, a sum sufficient to enable the Florgale Group to satisfy the liabilities to the NAB from its assets.

228. He conceded that the Florgale Group had not attempted to conduct a large sale of of stock at a discount in response to the financial difficulties experienced in the period leading up to the appointment of the voluntary administrator.

231. When questioned whether sales in the 10 months ending 10 April 1998 were $572,380 less than for the corresponding period, as stated in the Quick Evaluation Report, Mr Burnes stated that he did not know whether it was right or wrong, could not say whether the figure was "in the ball park", had never reviewed the Quick Evaluation Report and only "signed off" on his letter to the NAB dated 21 September 1998, which was drafted by the Florgale Group financial controller, Terry Maher.

234. At trial, Mr Burnes stated that he did not know what the Florgale Group sales figures for the relevant period were. He denied that there was widespread knowledge in the industry that the Florgale Group was experiencing financial difficulties. He denied any knowledge of the companies referred to in the Quick Evaluation Report which had stopped supply on credit. However, he disagreed that the Florgale Group stock levels were too high.

237. Mr John Burnes' evidence was inconsistent, confusing and unconvincing. It frequently conflicted with the statements included in, or the tenor of, the documentary evidence. Mr Burnes was uncooperative, unresponsive and defensive in cross-examination. He was not, in my opinion, a reliable or frank witness.

240. By August/September 1998, the Florgale Group was continuing to experience considerable financial difficulty and it was not meeting its sales budgets. It therefore retained Pitcher Partners to develop a strategy to address its problems. Mr Stewart of Pitcher Partners and John Burnes discussed three options available to the Florgale Group. Those options were: (a) to find an equity partner; (b) to sell two divisions of the business; or (c) to sell all five divisions.

243. In or about October 1998, Pitcher Partners prepared an Information Memorandum on the Florgale Group. The Information Memorandum proposed a purchase price of $1.5 million for four of the five divisions of the Florgale Group business. (At that stage, David Burnes had an interest in acquiring for himself either the sporting or apparel division of the business.) According to John Burnes, Mr Robert Peake of Pitcher Partners privately advised him that a figure of $800,000 - $1 million for four divisions (excluding the sporting or apparel division) was a realistic figure.

246. Pitcher Partners approached the Florgale Group's competitors and others, in order to assess the interest in the proposed sale. Mr Waters of Bizwear, a competitor, by letter to Pitcher Partners dated 21 October 1998 expressed interest in purchasing some assets of the Florgale Group, but stated that he considered the value was substantially less than the $1.5 million indicated in the Information Memorandum. The letter also expressed concerns about some of the information provided in the Information Memorandum.

249. By an e-mail dated 23 October 1998 to Pitcher Partners, Mr Waters stated that he valued the Florgale Group's current supply contracts, client list, uniforms, garments, raw material, stock and sundry plant and equipment at approximately $200,000. The e-mail noted that Mr Waters considered the supply contracts to be virtually worthless, the logoed stock to be worthless (as the existing contracts did not bind the clients), and the "stock service stock" to be fairly dated and in poor condition.

252. Pitcher Partners received further expressions of interest, but did not succeed in their attempts to sell the business (or any part thereof) of the Florgale Group as a going concern. Mr John Burnes was dissatisfied with Pitcher Partners' efforts to sell the business.

255. By late October 1998, the sales staff of the Florgale Group had not met the agreed sales budget, so the gross profit was not sufficient to meet budgeted expenses. Concerned about liability for insolvent trading, on 29 October 1998 the Florgale Group's directors resolved to appoint David Scott of Scott Partners as the voluntary administrator of each of the companies in the Florgale Group.

258. The voluntary receiver reduced the staff from about 34 persons to 17 staff. At trial, Mr Burnes stated that he could not give the exact number of despatch staff left after the reduction, but estimated three or four persons. Mr Burnes professed not to know what "a significant reduction" of staff would be. Ultimately, he conceded that there was only one despatch staff member left. Although he denied that a single despatch staff member would be incapable of handling the entire contents of the warehouse (for the purposes of a total closing-down sale) he conceded that six staff members in receiving and despatch had handled the normal volume of sales. There were also normally two people in the area of order entry and customer service.

261. The voluntary administrator also attempted to sell the Florgale Group business. On 31 October 1998, Mr Scott offered the Florgale Group's business for sale as a going concern. Shortly after, he prepared an Information Memorandum and advertised the business in "The Age" newspaper. There were a number of expressions of interest in response. The voluntary administrator received a number of inquiries from potential purchasers who signed confidentiality undertakings, but no sale was effected.

264. The voluntary administrator also retained Taylor Lockwood, a firm of auctioneers and valuers, to conduct a valuation of the Florgale Group's plant and equipment. Taylor Lockwood staff inspected the plant and equipment and, by letter dated 29 October 1998, ascribed an auction realisation value of $65,050 to it.

267. The directors of the Florgale Group did not notify the NAB of their intention to appoint a receiver. The voluntary administrator notified the NAB. An internal NAB Memorandum by Guy Edwards dated 30 October 1998 noted the appointment of a voluntary administrator to the Florgale Group. It stated that the NAB was unaware of any justification for the voluntary administration process. It estimated that, based on Orders' previous investigating accountants' report, stock (which had a book value estimated at about $1.9 million) was likely to realise $500,000 if sold as a going concern, and $303,000 on a "close down" basis.

270. By letters dated 2 November 1998, the NAB served formal demands on the Florgale Group companies, Group Textile and Thurston, demanding payment of $1,035,346.74, together with interest and bank charges.

273. On 5 November 1998, the NAB appointed Mr Orders as receiver and manager of the property charged by the debentures. The plaintiffs did not challenge his appointment.

276. Following his appointment as receiver, Orders, accompanied by two senior members of his staff (Norman Jones and David Quin), arrived at the Florgale Group's business premises in Brunswick at about 4.00pm on 5 November 1998.

279. The receiver and his staff met Mr John Burnes. They served the receivership documents on him. A meeting then occurred, attended by Messrs Orders, Jones and Quin, the Messrs Burnes and Florgale's financial controller, Terry Maher. The directors were handed a document which Orders routinely provided to company officers at the commencement of a receivership, entitled "Acknowledgment

of Responsibilities by Officers of the Company in Receivership" ("the Acknowledgment").

"1. Without the express written authority of the Receiver or a person authorised by the Receiver:

(b) No goods will be accepted by the company from any source whatsoever unless they are the subject of a signed order by the Receiver.

293. Messrs John and David Burnes signed the Acknowledgment. John Burnes testified that he understood it to prohibit him from making any contact with customers or from making any sales without first obtaining the receiver's written authority.

296. There is a conflict of evidence on what was said at the initial meeting on 5 November 1998. The Messrs Burnes contended that Orders expressly prohibited them from making any sales without his prior written approval. In his witness statement, John Burnes stated that at the meeting on 5 November 1998, Orders said that he was now in "complete and total control" of the company and that he instructed John Burnes to "have no further contact with clients regarding any matters unless instructed to do so". John Burnes stated that he informed Orders of discussions he had had with various parties regarding the sale of all or parts of the business. Orders said that "he or his staff would continue the sales negotiated for the business" and that the directors were not to be involved "in any way". At trial, John Burnes testified that Orders instructed him not to approach customers without written consent and "to sit in my office and do what he told me".

299. David Burnes also asserted that Orders informed those present at the meeting that he was in complete control and that all matters in future were to be referred to him or to his staff. Terry Maher gave evidence that Orders indicated that he would be in complete control of the company from that point on.

302. Orders testified that at the meeting on 5 November 1998, he advised that the assets of the Florgale Group companies would be under his control and that John Burnes stated that the companies were operating on a "skeleton staff" and had insufficient assets to repay the bank.

305. Orders denied that he prohibited the Florgale Group directors and staff from contacting clients, to seek orders and conclude standard sales transactions without obtaining his prior authority. He conceded that he instructed John Burnes at some point (which may have been the meeting on 5 November 1998) not to contact "contracted clients" due to the risk of not being able to guarantee supply and losing such customers while trying to sell the business as a going concern.

308. Orders testified that he emphasised that the companies would continue to trade and that staff should seek orders and contact customers. He did not prohibit any staff member from contacting customers of the business "because I was there to sell stock". He expected the Messrs Burnes to "contact clients that they deal with" to obtain orders.

311. David Quin, who was present at the meeting, could not recall Orders prohibiting John Burnes from contacting customers without prior consent and testified that such a comment was unlikely. Mr Quin prepared a contemporaneous file note of the meeting dated 5 November 1998, which states, inter alia:

"MJO explained all assets under his control. Directors' powers ceased as they did when Administrator appointed. J Burnes said trying to pay bank but doesn't believe there are sufficient assets in the company. Advised trust owns three properties which will have to be sold. Pitcher Partners provided brief valuing of business at $1.5 million with realistic value of $1 million excluding debtors." J.B. advised that he has been trying to sell business with Administrator. The company employs a skeleton staff only at present and is making some profit on orders. He mentioned Coles contract - advised contract not affected by appointment of Administrator or R&M."

315. Norman Jones, another member of Mr Orders' staff, was also present at the meeting on 5 November 1998 and prepared a file note. Norman Jones' handwritten file note states, inter alia:

"J.B. trying to pay out bank Not enough value company to pay out bank Trust properties to be sold - sell in an orderly way Went to Pitcher Partners - Equity Role - whole sale Administration ...going concern ... ...$1.5m - should get $1.0m including stock. Bizwear expressed cost plus $600,000. On Friday... all wanted to offer was $200,000 Skeleton staff @ moment..."

319. John Burnes initially denied that he told Orders that the Florgale Group was operating on a skeleton staff. Ultimately, he was unsure whether he had said "small" or "skeleton".

322. Immediately after the receiver's meeting with the Messrs Burnes and Terry Maher on 5 November 1998, the receiver and his staff addressed a staff meeting.

325. Norman Jones' file note of the staff meeting held at 4.35pm on 5 November 1998 states, inter alia:

"All assets... under control of R & M MJO legal liable for all debts MJO indicated personal liable ... Outlines trading position Security position - Priority creditors ... How long are we going to trade on Outstanding orders to be reviewed. DAVID Cash-flow position ... Creditors queries ...to be put to D.Q. No guaranties as to ... but continue until further notice With orders - need to ensure stock position..."

329. Orders testified that he also addressed the staff as a separate group on 5 November 1998, or on the following day. He stated that he told the staff that the Florgale Group companies were continuing to trade and that they should continue to take orders for the business. Although he could not recall who was present, Mr Orders asserted that he encouraged staff to seek orders and did not restrict or prohibit them because "it defies logic to trade a business on and not seek sales".

332. At trial, Mr John Burnes initially testified to a "total recollection" and "perfect" recall "like it's cast in iron" of the meeting on 5 November 1998. Subsequently, in the course of cross-examination, he admitted to uncertainty, lack of recall or weak recall. John Burnes' account of what was said at the meeting is inconsistent with the contemporaneous diary notes of Messrs Quin and Jones. As discussed in detail below, Messrs Orders and Quin presented as credible and consistent witnesses, whose account of events is, in many instances, supported by, or consistent with, the contemporaneous documents. In the case of conflict, I prefer their evidence to that of Mr John Burnes and Mr David Burnes. I am satisfied that the file notes of Messrs Quin and Jones accurately reflect the principal substance of what was said at the relevant meetings. Further, I do not consider that the Acknowledgment document which Mr Orders routinely distributed would reasonably be interpreted by experienced business people as a blanket prohibition on contacting any customers in order to secure an order or to make any sale without first obtaining consent.

335. On 5 November 1998, David Scott forwarded the Information Memorandum prepared by the voluntary administrator, together with a list of potential buyer contacts for the business, to Orders' firm.

338. Having assumed control as receiver and manager, Orders arranged for circulars to be sent to creditors and correspondence to be sent to the Deputy Commissioner of Taxation. Mr Quin, a chartered accountant and registered liquidator, was mainly based at the Florgale Group's premises in Brunswick.

341. Under Mr Orders' supervision and instructions, his staff operated the business, contacted customers and suppliers, investigated the Florgale Group's financial position and compiled a new information memorandum to be sent to potential purchasers of the Florgale Group's business, assets, or parts thereof.

344. On 10 November 1998, Orders sent confidentiality undertakings to 24 persons who had expressed an interest in purchasing the Florgale Group's business or its assets.

347. Quin familiarised himself with the Florgale's Group's operations, finalised a stock-take commenced by the voluntary administrator and considered retention of title claims, employee entitlements, and the collectability of debts. He also dealt with customers' claims and queries.

350. In his witness statement, John Burnes stated that in the week commencing on 9 November 1998, he approached Quin and suggested contacting customers and offering them their particular style and colours at a range of discounts, in order to achieve the maximum return for stock. He had prepared a summary sheet listing clients during the voluntary administrator with "various discount points that such stock could be sold at". Burnes stated that Quin responded that it was none of Burnes' business and that he (Quin) would make the necessary sales arrangements as he saw fit.

353. Quin denied that such a conversation ever occurred. He stated "I would never say to a director of a company that it was none of his business. Nor would I say that I would be making all the arrangements". Quin stated that if Burnes had made suggestions about the sale of stock, he would probably have discussed it with the receiver and sought his advice, because "I know that the receiver and manager likes to consider input from the directors. He would have been interested in hearing any suggestions in relation to the sale of stock." There is no apparent reason why Quin would respond to a director in the manner alleged by Mr Burnes. There was no contemporaneous complaint. It is inconsistent with Quin's regular and documented consultation of the directors for approval on sales at a discount and Orders' documented consultation of them on other matters, discussed below. Further, I considered Mr Quin to be a credible and consistent witness. I accept his testimony.

356. On 9 November 1998, Quin retained Taylor Lockwood to value the Florgale Group stock. Taylor Lockwood personnel visited the Florgale Group's premises. They valued the stock on the basis of percentages of cost price to produce market value, existing use, and auction realisation value. Taylor Lockwood confirmed the valuation by letter to Bird Cameron dated 20 November 1998.

359. Mr Quin testified that Taylor Lockwood staff gave him the percentages orally and he then prepared a valuation of stock by using the Florgale Group Inventory Analysis of stock as at 31 October 1998. He calculated the cost price by deducting 30% from the selling price and then applied the percentage of discount estimated by Taylor Lockwood to produce the estimated auction realisation value. Quin's calculations produced a figure of $345,242 for the estimated auction realisation value stock as at 31 October 1998. In making the calculations, Quin did not make any further discounts to take account of old or soiled stock.

362. Quin contacted the Florgale Group's Sydney employees, Helen Pearson, and De-anne Hespe and liaised with Erica Kirchner, its agent in Tasmania.

365. He calculated the Florgale Group's superannuation liability and cash position, obtained a mailing list, opened necessary accounts and arranged for necessary services.

368. By letter dated 10 November 1998 to Norman Jones of Bird Cameron, John Burnes expressed concern about a number of specified clients of the Florgale Group. The letter noted that the directors had sought to sell the business as a going concern or to find a new equity partner through Pitcher Partners, and had appointed the voluntary administrator when concerned about Pitcher Partner's lack of progress.

371. The letter further stated "As each day passes our competitors become more aware of our position and rather than purchase our Business can look to pick up the pieces at no cost. Our "specialist stock" greatly reduces in value if this occurs. The longer we delay in advising the customers I have listed the greater the danger that they will be approached by our competitors and the chance will be lost to sell that section of our sales and also the unique stock that we hold for them".

374. The letter noted that the voluntary administrator had instructed the Florgale Group to reduce the number of staff to the absolute minimum to permit the business to continue and be sold as a going concern. It stated "We have three only staff for Despatch Order Entry/Customer Service. These areas were previously handled by nine staff. If one leaves again we have a major problem".

377. By a letter to Norman Jones dated 11 November 1998, John Burnes advised that he had received a copy of a facsimile sent by Coles to all Coles supermarkets, advising the staff to cease buying from the Florgale Group until further notice. The letter stated "Coles garments are uniquely designed and I am therefore concerned that this action will greatly reduce the value if any of our stock for this client".

380. Orders prepared a report dated 11 November 1998 addressed to Guy Edwards of the NAB. The report gave an auction realisation value of $337,620 for stock, which was derived from Quin's calculations based on the Taylor Lockwood valuation of 9 November 1998, partly on a stock count, and partly on the companies' stock records.

383. The report referred to a number of retention of title claims. It also referred to a budget to 30 November 1998, with forecast sales of $137,000, a cost to sell of $100,000 and operating expenses of $80,000, resulting in a budgeted net loss of $43,000 for the period from 11 November 1998 to 30 November 1998.

"Given the size of the expected loss in the budget period a decision has to be made on whether to continue to trade. The advantages of continuing to trade are that a buyer may be found who will pay an amount for goodwill for the group's various supply contracts. Further, there may be a saving as to termination payments. However, if I was to continue to operate the business, the losses have to be funded. Any losses incurred will erode the bank's security. Further, based on the information contained in my investigating accountants report, the bank is likely to suffer a shortfall in relation to the properties owned by the group..."

390. The report noted that no purchasers of the business had been forthcoming, despite the successive attempts of Pitcher Partners and Scott Partners to market it. It continued:

"Given the above, I recommend that the operations of the group should cease. As work in progress is likely to have no value, I consider that an assessment be made and any profitable work in progress completed. Sufficient staff would continue to be employed for this purpose." ... Stock on hand will be offered to customers at the best obtainable price provided this price is above the auction realisation price. All unsold stock and plant and equipment will be sold by auction_"._ (Emphasis added).

394. On 11 November 1998, Orders discussed his report at a meeting with Messrs Isherwood and Edwards of the NAB.

397. Orders' file note of the meeting dated 11 November 1998 noted:

"Closure of business. MO - Reviewed report with RI and GE - Reviewed budget with RI and GE - MO also gave a list of parties who had inquired re sale of business with both Administrator and R&M - Discussed trading loss versus Advantages of sale - RI - advised closed the business."

401. At trial, Mr Orders testified that at the meeting with Messrs Edwards and Isherwood, he reiterated his written recommendation that stock should be offered to customers at the best possible price in excess of auction value, and that the NAB officers agreed with the recommendation. They also agreed with the recommendation that the directors should be asked to fund closing losses if the business should close.

404. A handwritten notation on the report notes, inter alia:

"Based on report and discussions - complete confirmed orders - discuss support guarantors to provide funding to trade; or - close business - sell stock by approaching trade (Emphasis added). - investigate reduction in debtors ledger - increase provision to $550,000"

408. The handwritten note is that of Guy Edwards of the NAB. At trial, Mr Edwards gave evidence, which I accept, that his notation reflects the discussion which occurred at the meeting. Although his independent recollection of events was slight, Mr Edwards denied that his note represented instructions which either he or Rex Isherwood gave to Mr Orders. He denied that the NAB decided on what course the receiver would adopt, but agreed that the NAB concurred in Orders' recommendation that the trade, including customers, should be approached, in order to explore whether a better price for the special purpose stock could be obtained in that way than at auction.

411. Mr Edwards, who was himself an experienced receiver, considered that it would be beneficial to approach the customer base before deciding on an auction when disposing of stock after a decision had been made to close the business. However, he did not agree that it was a standard practice.

414. I am satisfied that Orders, as reflected by his report to the NAB dated 12 November 1998, recommended that trade, including customers, should be approached and that the business should be closed, unless the directors were prepared to fund the losses involved in continuing to run it. I am also satisfied that the NAB officers expressed their agreement or concurrence with that advice, although they did not make the decision or instruct Mr Orders in the course he should take.

417. Following the meeting of Orders and the NAB officers on 12 November 1998, there was a meeting at the Florgale premises attended by Messrs Orders, Jones, Quin, the Messrs Burnes, and Mr Terry Maher.

420. There is a conflict of evidence on what was said at the meeting.

423. Orders testified that at the meeting, he presented a budget disclosing a projected loss for the business from 11 November 1998 to 30 November 1998 of $42,000. He went through the items of revenue and expenses that made up the budget and pointed out a contingency of $10,000.

426. In his witness statement, Orders stated that:

"John Burnes told me that my projection of trading losses to 30 November 1998 of $42,000 might be conservative because customers could not be guaranteed supply. Because of the nature of my appointment I was not in a position where I could guarantee customers, staff or suppliers of the Florgale Companies that the Companies would continue to operate".

430. He testified that he discussed the different options of: (a) continuing to trade while funding ongoing losses; (b) selling the business; and (c) closure of the business.

433. In his witness statement, Orders stated that:

"I asked John Burnes whether he or his family would be able to fund any trading losses and allow the businesses to continue trading whilst looking for a purchaser. John Burnes told me that his family had no money and that it had injected $3 million into the business of the Florgale Companies in the past two years including $250,000 which was injected in February 1998".

437. In his witness statement, Quin stated that the issues discussed at the meeting of 12 November 1998 included, inter alia:

a. the budget for trading by the Florgale companies to 30 November 1998 ...

b. the possibility of continuing to trade in order to maximise the amount that could be realised for the Florgale companies or their assets...

g. Malcolm Orders said that if there were no firm offers received by 13 November 1998, the operations of the business would have to be stopped. John Burnes agreed with Malcolm Orders' statement that because of the risks of incurring further losses, he could not continue to trade on the `never `never".

445. At trial, Mr Quin testified that a cash flow statement was produced at the meeting on 12 November 1998. He denied that Orders asked the directors to contribute $20,000 to $30,000, in order to continue trading.

448. Quin's file note of the meeting on 12 November 1998 records that a budget showing a loss of $42,000 was discussed. It states, inter alia:

"MJO commented that JB was saying losses could be worse than budget because of losses on other sales. JB agreed. He said there may be a problem with forecast sales. JB said sales could be lost because no guarantee of continuity of supply. MJO said he agreed and continuity of supply became a problem when Administrator appointed. . . . MJO explained options - continue to trade and incur loss - cease to trade - try to sell business ... JB said we have to consider whether losses can be covered by a higher price for assets from selling as a going concern. J.B. explained Coles knew of situation through a competitor. ... JB: what are you going to do with customers MJO: said we can ring them but we can't guarantee supply."

452. The file note of Norman Jones of the meeting on 12 November 1998 records that Orders noted that continuity of supply was a problem. It also indicates that Orders stated that there were trading losses and that he could not trade on the "never never", with which John Burnes agreed. The file note further records that Orders stated that if he could not secure potential buyers for the business, he would first finish the profitable work in progress, and close the business.

455. Norman Jones' file note also records the following:

"... "JB: Clients won't call back - ... " "MJO: We will contact them but to be taken with full knowledge of continuity - seek orders".

459. The Coles contract was discussed at the meeting. Orders testified that John Burnes referred to his concerns about the directive to Coles' staff to seek an alternative supplier, and that John Burnes said that the estimates of losses were conservative, due to the loss of the Coles contract and the inability to guarantee supply to customers. John Burnes testified that he had asserted that `Coles had died' and that Orders was to blame.

462. John Burnes testified that he urged Orders to contact customers. He conceded that Orders may have said that the customers would be called, but that continuity of supply could not be guaranteed.

465. Orders denied that at the meeting on 12 November 1998 John Burnes made proposals to contact customers, to which Orders responded negatively. Rather, he contended that customers were already being contacted, and that he urged the Messrs Burnes to continue to do so, as even if trading ceased, it would still be necessary to sell stock in order to raise revenue.

468. In his witness statement, John Burnes stated that Orders:

"...advised that [the cash flow statement] showed the business running at a $20,000 - $30,000 loss per month if it continued to trade for the month of November".

"Orders called on the directors to contribute $20,000.00 or $30,000.00 personally if we wished him to continue trading and we said we were not prepared meet this request".

474. In his witness statement, David Burnes stated:

"At the meeting on 12 November 19998 [sic] Malcolm Orders showed me a cash flow statement which he said Norman Jones had prepared. The statement showed the business running at a $20,000.00-$30,000.00 loss per months if it continued to trade for the month of November. Orders called on me and John to contribute $20,000.00-$30,000.00 personally which I indicated I was not prepared to do".

478. Mr John Burnes agreed that the document "Profit and Loss Combined", prepared by Bird Cameron Partners and the budget for the period 5 November 1998 to the end of November 1998 were discussed at the meeting on 12 November 1998. He stated that he saw the document for the first time on the day of the meeting. He was told it was a cash flow prepared by Norman Jones. He testified that he could not see or understand the detail of the document. He asserted that the Profit and Loss document tendered in evidence was not the same as the document he was given at the meeting.

481. At trial, John Burnes conceded that at the meeting, Norman Jones' estimate for loss until the end of November 1998 at the meeting was not $20,000 to $30,000, as he had stated in his witness statement. He agreed that the meeting commenced with Orders explaining that there would be an estimated $42,000 loss to 30 November 1998, and that the figure was arrived at by looking at the sales and the cost of goods and expenses, while making an allowance of a $10,000 general contingency for other matters not contained in the budget calculations. He asserted, however, that various estimates of the potential loss were made at the meeting, and that he (John Burnes) spoke of a loss between $20,000 to $30,000.

484. At trial, John Burnes conceded that he believed that the continued trading of the Florgale Group to the end of November 1998 would result in a loss between $37,000 and $42,000. However, he denied that his comments in relation to the probable losses for the rest of November were based on his independent view, contending that they were based on the figures provided to him by Norman Jones and Mr Orders. He denied having had input into the budget, asserting that it was prepared by Terry Maher and Norman Jones.

487. In cross-examination, Mr David Burnes conceded that he did not see the cash flow statement spreadsheet at the meeting, as he had stated in his witness statement. He asserted that Orders informed him that there would be a loss in the vicinity of $20,000 to $30,000 and asked him what he was prepared to do about it.

490. Terry Maher, the financial controller of the Florgale Group, together with Norman Jones, assisted in the preparation of the figures for the Florgale Group. Mr Maher was not an impressive witness. At trial, his recollection of the meeting on 12 November 1998 was very poor. He could not recall whether several draft cash flow documents were prepared leading up to the meeting on 12 November 1998. He could not recall whether the final version of the document showed a loss or a profit. He could not recall whether there was discussion about a cash flow document or a $10,000 contingency at the meeting on 12 November 1998. He did not recognise the cash flow document in cross-examination. Ultimately, Mr Maher conceded that he could not recall anything that was said or done at the meeting on 12 November 1998.

493. Following the main meeting on 12 November 1998, Malcolm Orders and John Burnes had a private conversation.

496. Orders' file note of the conversation records the following:

MO: "You said today that you were not allowed to contact clients. That's not true. You have never been advised not to seek orders"

501. At trial, Mr Burnes conceded that he and Malcolm Orders had the above discussion.

"I need to know are you or your family in a position to fund trading losses. This would effect the decision to close. John Burnes responded: We have no money left. We put in $3 million in the last 2 years and put in the last $250k in February. The simple answer is NO."

508. Orders testified that he balanced the advantages and disadvantages of continuing to trade. His file note dated 12 November 1998 and 11 November 1998 states:

"File Note Re Closure - Advantages of Trade On/Sale May realise a value for assets [greater than] auction May avoid having to pay termination payments May achieve value for goodwill if contracts assigned: Coles Supermarket; Baptist Community Service; Mornington Peninsula Royal District Nursing; St Vincents Sydney; Baptist Community Centre. Disadvantages May not find a buyer for business - High Risk Trading losses of $42,899 if business not sold in 40 days Trading losses don't include allowance for additional R&M fees - could be additional cost of $20k plus above that if business closed. [therefore]Trading losses of trade could be $62,899+. Directors engaged Pitcher Partners to find a buyer prior to appointing Administrator and were unsuccessful in identifying a buyer. Shortfall to secured creditor - if not sold shortfall increases, secured creditor taking the risk and advised does not wish to trade on No certainty a buyer will be identified which will produce returns > closure Based on above a decision to cease operation unless directors are prepared to fund the losses."

512. At the meeting on 12 November 1998, Orders informed John Burnes that his staff had made attempts to sell the business with little success to date, and gave him a list of potential purchasers which had been approached, telling him that he was free to contact any of them himself, as well as others not on the list. Orders stated that if a firm offer could not be obtained by 5.00 p.m. on 13 November 1998, he would close the business down by 16 November 1998.

515. On the afternoon of 12 November 1998, John Burnes contacted several prospective purchasers, including the managing director of Yakka, Mr Andrew Edgar, who attended the Florgale Group premises that same afternoon for an inspection. Both David Quin and John Burnes were present. Edgar indicated that he was interested in parts of the business, but required an information brochure.

518. Although Orders had indicated that an Information Memorandum would be available by close of business on 12 November 2004, it was not, in fact, provided until Tuesday 16 November 1998.

521. At trial, Mr Orders conceded that he did not consider that there was a realistic prospect of securing a firm offer to purchase the business by 5.00 p.m. the following day but sought to pressure the directors to contact the most likely prospective purchasers.

524. By a letter to Guy Edwards of the NAB dated 12 November 1998, John Burnes, expressed grave concern "at the current position in regard to the appropriate realisation of Business and Assets of the Florgale Professional Group which in my estimate is reducing rapidly on a daily basis since the appointment of Mr Malcolm Orders...".

527. The letter stated that Burnes had been instructed to make no further contact with any clients "to seek to reassure them concerning continuity of supply". It further stated, "In the meantime of course our opposition has been approaching our client base with the story that our companies are in Receivership, and they must seek alternative supplies from them... The position again deteriorated on the 11th November with a circular sent to all Coles staff requesting that they cease buying from our company - see copy enclosed. Put simply our client base is being lost to our opposition due to a total lack of communication. As this occurs `specialist stock' reduces in value to next to nothing - to whom else but Coles staff can you sell a Coles Logoed blouse".

530. Edwards, by letter to Orders dated 12 November 1998, requested Orders to respond to John Burnes' complaints. The letter of Orders to Edwards of the NAB dated 16 November 1998 stated, inter alia,

"I confirm the instructions of my staff on Friday, 6 November 1998 that contact should not be made with contracted clients at that stage because of the uncertainty of the assessment of the trading position. I would reiterate that at that time I was not made aware by Mr Burnes of which clients were in fact contracted and further I was not informed of what representations were intended to be made to contracted clients. ... At all times Mr Burnes was under clear instructions to seek orders that were profitable and which could be completed in the short term and to this extent Mr Burnes was at liberty to contact clients. This is not disputed".

534. Despite his stated intention to close the business on 16 November 1998 if no firm offers were received, Orders in fact continued to trade until 25 November 1998. At trial, Quin stated that the business was not closed on 16 November 1998 because there were approximately 20 prospective purchasers who had expressed an interest. Further time was necessary for those persons to execute confidentiality undertakings and to conduct due diligence. Orders testified that the decision to trade on for a longer period was a commercial decision, rather than a response to John Burnes' complaints.

537. Orders could not recall when he informed the NAB that he had decided to extend the "trade-on" period. He agreed that he probably discussed John Burnes' complaints with Guy Edwards, albeit not immediately, and that he kept the NAB informed. Edwards could not recollect discussing Mr Burnes' complaints with Orders or participating in a decision to extend the trading period.

540. While Orders attempted to sell the business as a going concern, the Florgale Group continued to sell stock, including stock at a discount. The receiver referred proposed sales at a discount to John Burnes or David Burnes to seek confirmation that the offered discount price was reasonable. A leaflet was prepared advertising a clearance sale for bowls stock. Various invoices for sales at a discount were approved in writing by the Messrs Burnes. The plaintiffs assert that little stock was sold and there was no "pro-active" effort or strategy to sell it at a discount.

543. On 19 November 1998, Orders sent a Report as to Affairs to the directors.

546. During the week of 16 to 20 November 1998, Orders' staff continued to deal with prospective purchasers of the business. By 24 November 1998, no offers for the business had been received. Orders, concerned about the continuing losses, at 12 noon on 24 November 1998 met the Messrs Burnes. They discussed the various parties who had expressed an interest in buying the business. Orders said that it was clear that there were no genuine interested parties. John Burnes made a number of telephone calls to various parties. He expressed his conviction that an offer would still be received. Orders then met the Florgale Group staff. He explained that he would wait until 12 noon on 25 November 1998 for two prospective purchasers to get back to him, but if an offer were not received by that time, he would have no choice but to cease operating the Florgale Group business.

549. On 25 November 1998, Orders and Quin, having been advised that Bizwear was only interested in stock, and that Yakka would get back to him by 5.00 p.m., advised the Messrs Burnes that the employment of staff, including the Messrs Burnes, would be terminated that day.

552. On closing the business, Orders decided to auction the remaining stock.

555. He contacted Dennis Mathews of Taylor Lockwood to discuss the proposed auction. Mathews told him that the most appropriate date would be 8 or 15 December 1998. The latest date in 1998 for holding an auction was 15 December. As January was not a good time of year to hold an auction, the earliest realistic date in 1999 for an auction would be February.

558. Quin also testified that he spoke with Mathews. The file note of Mr Quin dated 25 November 1998 records "advertise this week 28/11 & next week 5/12. Hold auction 8/12/98. Good time to have auction B4 latest 15/12/98. Next available 2 week in Jan - not a good time - Next good time First week of February".

561. On 25 November 1998 and 26 November 1998, Orders received telephone calls from Mr Waters of Bizwear, in which Waters expressed interest in stock associated with contracts and stock with logoes. He also wished to discuss purchase of Coles stock. Orders informed Waters that he could not guarantee an assignment of the contracts. He invited him to view the stock and stated that he would accept the highest offer received.

564. The plaintiffs submitted that Orders' evidence of his conversations with Mathews and Waters of Bizwear should be rejected. Quin had made file notes of similar conversations with the same persons on the same days. The plaintiffs argued that it was improbable that both Orders and Quin had had similar conversations with those persons on the same days, and that Orders had reconstructed the conversations from Quin's file notes.

567. Mr Orders, however, testified that his conversations occurred, although the file notes had refreshed his memory. He stated that he discussed the auction with Mathews as "the decision to go to auction, for any company in administration, is a very serious course of action to take. I would never leave that decision to a manager to resolve with an auctioneer, I would have to be involved in that decision making."

570. Further, he testified that "It's not uncommon for ... an interested party to speak to one of my staff and also speak to me, it's not uncommon." In relation to the telephone calls with Mr Water of Bizwear, Orders stated "[Waters] may have rung up asking for me, and David Quin answered the phone and took the substance of the phone call. I didn't know but I ended up speaking to him." I accept Mr Orders' testimony on the relevant conversations.

573. Orders testified that from the date of deciding to auction the stock until the auction itself, efforts to sell to competitors or to customers continued. Orders' policy was to withdraw stock from auction for sale if it were cash flow positive and in excess of auction value. He invited John Burnes, Deanne Hespe and others to sell stock at any price above the estimated auction value, in return for a 10% commission.

576. In cross-examination, John Burnes agreed that on 24 November 1998, Orders invited him to assist in selling stock above auction value and offered to pay Burnes 10% commission for the proportion of the price above estimated auction value.

579. Mr Burnes was inconsistent and evasive in cross-examination on this topic. He agreed on several occasions that he accepted Orders' offer, stating "I accepted the proposal, yes ... ". "I accepted that it was a genuine offer, yes." ... "Yes, I accepted it, to act on, yes" but subsequently stated that he declined the offer.

582. Burnes also agreed that the same invitation was made to other people, but he subsequently stated that he did not know that Orders had invited other staff to assist in selling.

585. Although he ultimately agreed that he accepted the offer to sell on commission and "attempted to see if I could sell that stock", Mr Burnes did not sell any stock on commission. He explained was that when he told Quin on 24 November 1998 that Orders had told him he could sell the stock, Quin replied that he was preparing it for auction and "contradicted the authority I'd been given". Quin stated that he did not recall such a conversation and testified that the receiver was happy to consider offers for stock. Orders' evidence was that "I would have dealt with anybody who wanted to buy stock from me." I do not accept Mr Burnes' evidence on this question.

588. Although he initially denied any knowledge that, after 24 November 1998, Orders was seeking to sell stock at above estimated auction prices, ultimately Mr Burnes agreed that he was "well aware that sales of stock at a discount were taking place." Mr Burnes at first testified that he could not recall having any involvement in the sale of stock at a discount. He also denied that he was involved in giving recommendations on whether discounts should be accepted. Ultimately, however, he conceded that he signed and confirmed proposed sales at a discount referred to him by Quin.

591. John Burnes initially denied that he purchased anything at a discount himself. He then conceded that he purchased only plant and equipment, and ultimately that he bought fabric at a discount. He stated, "I put a price in and the price was accepted". He conceded that he also offered to purchase other stock at a discount for on-sale.

594. He agreed that he approved a proposal by Ms Hespe for sale of the Sydney stock, a sale at a discount to Mr Phillips on 8 December 1998 for on-sale at a profit, and a sale at a discount to the Royal District Nursing Service.

597. When asked whether the Florgale Group staff were active in seeking to sell discounted stock, Mr Burnes was unresponsive. He replied, "I am not sure if Mr Quin was selling the stock or my staff were selling the stock."

600. Mr Burnes agreed that Quin brought him proposed sales to "sign off", consulted with him, requested his views as to offers and his recommendations as to what stock belonged to third parties.

603. David Burnes was evasive and unresponsive in cross-examination in relation to sales. He agreed that Quin frequently sought his advice about sales. He agreed, at one point, that Quin was involved daily in sales transactions. He then stated that he could not recall Quin having anything to do with sales. He agreed that he gave assistance as to the sale of stock and advice as to orders "when asked". He stated that in his view, staff were "reacting to orders coming in " but were "not pro-active". He denied that he was involved in sales "in a pro-active way".

606. David Burnes stated that Quin "was completely relying on inquiries coming to us". He was unable to say whether it was hard to achieve sales given that a receiver had been appointed.

609. Mr Phillips, the Florgale Group sales manager, agreed that he spoke to customers and arranged for sales of Florgale Group stock from the appointment of the receiver until some time in early December. He agreed that he was selling stock throughout that period, although no-one asked him to do so. Mr Phillips was not an impressive witness. Despite an initial inability to recall, he acknowledged some specific sales at a discount.

612. He agreed that there were other Florgale Group staff actively involved in selling stock. Mr Phillips personally purchased a total of $3,366 worth of stock on or about 8 December 1998, for which he made an offer on the basis that the garments would soon go to auction and sell for less. He acknowledged that "it was a substantial discount". He intended to on-sell it to Florgale Group customers for profit. He believed that his offer was approved by John Burnes. Phillips believed that a number of other sales occurred during the receivership prior to auction.

615. Eleven customers, including three of the Florgale Group's largest customers, gave evidence. Ten of them testified that they had not been contacted and invited to purchase stock or notified of the auction, although several of them had regular contact with John Burnes or David Burnes. In some cases, John Burnes or David Burnes had contacted the relevant customer but had not advised that stock was available for purchase or advised of the auction. The evidence of the customer witnesses is discussed in detail below.

618. Helen Pearson, the manager of the Sydney store, testified that between early November and late November 1998, she received several enquiries from customers regarding stock, including an offer from a nursing home willing to pay $8,500 in cash, but that Quin did not authorise her to proceed with the proposed sales. Ms Pearson testified that she advised Quin that unless the stock were sold to customers before the auction, it would be "nearly worthless". The Sydney stock was valued at $100,000 by reference to the retail price. On 25 November 1998, removalists arrived and placed the stock in garbage bags.

621. On 25 March 1999, Ms Pearson wrote letters to Orders, Edwards and David Scott expressing her "horror" at the manner in which the "winding up" of the Florgale Group had been handled and the cavalier way in which the Sydney stock was packaged. The letters referred, inter alia, to the offer for nursing home stock and the other enquiries she had received, noting that Mr Quin had not authorised her to sell the stock.

624. At trial, Mr Quin recalled a conversation with Ms Pearson in relation to a bank account, but did not recall the alleged telephone conversation in which she had sought authority to proceed with a proposed sale to a nursing home to the value of $8,500, or the alleged follow-up telephone call. He testified that sales staff would bring orders to him for review and approval, and that his instructions from Orders were to accept any order which was cash flow positive. Quin had no file note of the alleged conversations. He denied that the attempt to sell the business as a going concern would preclude sales of stock.

627. Quin drafted the reply to Ms Pearson's letter. His letter addressed a number of complaints, but did not refer to the proposed sale to the nursing home. Mr Quin insisted that he was unable to recall the conversations. I considered Mr Quin to be a precise and conscientious witness. While it would appear probable that there was a conversation in which Ms Pearson made a reference to a proposal to sell stock, I am unable to conclude that a conversation in the terms to which she testified took place. I consider it improbable that Mr Quin would have failed to respond to, or make a file note of, an offer for $8,500 cash on delivery for stock, had he apprehended that such an offer was proposed. Similarly, I am satisfied that Quin understood that the receiver required sales which were cash-flow positive to be approved, including during the trade-on period whilst attempting to sell the business as a going concern, subject to the directors' approval of sales at a discount. There is no apparent reason why Quin would fail to respond to such an offer had it been clearly communicated and apprehended.

630. A number of sales at a discount were concluded after the closure of the business. Eighty-four lots were sold before auction and were withdrawn. On the plaintiffs' analysis, 32 of those lots were stock. Quin testified that sales were concluded during the pre-auction period, provided that they were cash-flow positive.

633. Two staff members remained working after closure of the business, one of whom was a despatch worker.

636. By letter to the NAB dated 8 December 1998, Orders provided an updated report. It estimated the value of stock at $279,431 and work in progress at $4,405, although the total estimated value of the security was stated to be subject to the costs of realisation. The report stated that all of the stock had been counted, with one minor exception. Next to the list of the types of stock and the total value of stock, a handwritten notation stated "any possibility of flogging stock in market rather than industry auction" but was deleted under the words "refer point 3". Point 3 of the letter stated "Auction. I have instructed Taylor Lockwood to auction all of the company's stock, plant and equipment. To this end, an auction will be held at the companies' premises on 15 December 1998. Attempts are also being made to sell stock, especially stock that is branded as it has a low auction realisation value, prior to auction." (Emphasis added).

639. The handwritten notation was that of Mr Edwards of the NAB, who had deleted his note about selling stock to customers first, because the receivers' report had subsequently addressed that issue.

642. The auction of Florgale Group stock and plant and equipment was conducted by Taylor Lockwood on 15 December 1998 at the Florgale Group's premises. The total proceeds of the auction of the stock was $74,200. Not all of the stock was sold at auction. The total value received for all stock was about $100,000.

648. John Burnes deposed in his witness statement:

"After the Auction I asked David Quinn [sic] to provide me with a list of the buyers and price at which each lot was sold but he refused to supply me with this information".

652. Mr Quin denied that the alleged conversation occurred. He stated that if he had had information about the proceeds of auction which Mr Burnes sought, he would have provided it. I accept his testimony.

655. Mr Burnes was informed of the auction result in April 1999.

658. The NAB enquired about the result at auction by the letter of Guy Edwards to Orders dated 22 December 1998.

661. Orders replied by letter to the NAB dated 27 January 1999. The letter contains some handwritten notes by the bank officers, which, inter alia, state "unsatisfactory performance". The letter stated that the auction was well attended, but there were very few bidders and the market's interest in the stock was overestimated. The handwritten note states "This should have been considered in the valuation" and "disappointing".

664. A handwritten note further states "Why was specific purpose stock sold at auction. The market should have been specifically targetted (sic) by receiver and other uniform manufacturers or end markets". Mr Edwards gave evidence that the handwritten note "disappointing" was his own and the other notation was probably that of his senior officer, Mr Ben Edney. Edwards stated that he was disappointed with the auction result, given the valuation, but did not agree that he considered Mr Orders' performance had been unsatisfactory, as sometimes "market whims are what they are", and the receiver had advised that he had sought to sell the stock prior to auction. Orders attended a meeting with bank officers on 8 February 1999. He testified that he was not subject to criticism at the meeting. The attempted sale of stock and the auction were discussed, and there was general agreement that the problem was not with the auction, but with the initial valuation, which had created false expectations.

669. The Florgale Group Inventory Analysis as at 31 October 1998, prepared by Terry Maher, the financial controller, ascribed a value of $1,397,948 to finished goods and $677,204 for work in progress.

672. In the Florgale Group's financial statements the finished goods were valued at wholesale price, less 20%.

675. Mr McVeigh, a chartered accountant, liquidator, trustee in bankruptcy and experienced insolvency practitioner, gave evidence on behalf of the plaintiffs.

678. Mr McVeigh agreed that the appropriate method of valuation of stock in a company's books of account is, in principle, the lower figure of cost or net realisable value. A profit element is normally excluded. The established method took account of possibilities, including a fall in selling price, physical deterioration, obsolescence of the product and changes in market demand.

681. The Report of the Voluntary Administrator dated 17 November 1998 stated "The directors have disclosed an amount of finished goods of $1 million on the Report as to Affairs. They have established that the realisable value of stock is unknown due to the specialised nature of the stock."

684. The internal memorandum of Guy Edwards of NAB dated 30 October 1998 stated that Florgale Group stock was likely to realise $303,000 on a close down basis.

687. The Taylor Lockwood valuation of stock appraised on 9 November 1998 ascribed a series of percentages for discount to different types of stock, which, when applied by Quin to the stock in the Inventory Analysis, produced a value of $337,620 to the Florgale Group stock as at 31 October 1998.

690. In the Form 507, completed by John Burnes on 21 December 1998, Burnes inserted the figure of $150,000 for the estimated realisable value of stock. In another version of the Form 507, Mr Burnes inserted the figure of $200,000 for the estimated realisable value of stock.

693. At trial, he testified that the figure was not his own assessment of the stock value, but that he inserted $150,000 on the instructions of David Quin, given in the course of a telephone conversation on the morning of 21 December 1998. Further, he stated that in the afternoon, Quin telephoned him and told him to amend the figure to $200,000. Burnes testified that he did not know the auction result at that date and was not informed until much later, despite inquiries.

696. Quin denied the first alleged telephone conversation on 21 December 1998. Although he did not dispute that he had a telephone conversation with Mr Burnes on the afternoon of 21 December 1998, he denied giving Burnes any information or instructions in relation to stock values. Quin testified that he only provided figures for liabilities, supplied to him by Terry Maher. Quin's file note reflects the conversation to which he testified, and I accept his evidence.

699. I am satisfied that Burnes' estimate of value in the Form 507 was not based on a figure provided by Quin or on Quin's instruction.

704. At trial, the plaintiffs sought to lead evidence by John Burnes of his estimates of the returns achievable for the stock in the Inventory Analysis "if it had been sold by a competent receiver". Mr Burnes did not claim experience or expertise in relation to sales in the course of liquidation or receivership. Mr Burnes' opinion evidence relating to sale by a receiver in an insolvency context was therefore inadmissible. However, I considered that he was qualified to give opinion evidence in relation to a sale to customers at a discount, over a short period (which was fixed at six weeks) in a non-insolvency context, based on his experience as a longstanding director of, and participant in, the Florgale Group business. Such evidence was relevant both to loss and damage and to the allegation that the receiver had breached his duty by failing to use all reasonable care to sell for market value or the best price reasonably obtainable in the circumstances. The defendants contended, correctly, that the requirements of Order 44 of the Supreme Court (General Civil Procedure) Rules 1996 had not been complied with, and Mr Burnes' calculations were, in essence, submissions rather than evidence. Mr Garde submitted, correctly, that even if Mr Burnes were qualified to give opinion evidence on discount sales in non-insolvency contexts, he lacked the expertise to give evidence involving calculations of costs and related financial matters. The plaintiffs did not call an expert witness to give "quantative" evidence on loss and damage. The Court was informed that that was due to financial constraints. I permitted Mr Burnes to give opinion evidence restricted to discount sales achievable in a non-insolvency context.

707. John Burnes stated that he was employed as deputy manager of the Florgale Group in 1960. In 1964 he became managing director. It was a family business. He was engaged continuously in the affairs of the Florgale Group until December 1998. He was responsible for the sale of linen. Other staff handled other matters. He exercised overall control and made the final decision on discounts, although he received staff recommendations. The Florgale Group had a policy of offering discounts, which was in place for over 20 years since the mid 1970s.

710. Mr Burnes gave his opinion on what discounts would be necessary in order to achieve the sale of the entire stock listed in the Inventory Analysis as at 31 October 1998 within a six week period to the existing customers of the Florgale Group.

713. Coles Supermarket stock was valued at $196,535. It was made up of lines that were part of the Professional Uniforms stock range, except that it had a Coles logo attached. John Burnes testified that, in order to sell the Coles stock within the six week time frame, a 20% discount would be required. He would have attempted to sell it as part of the Professional Uniforms stock range. The logoes would have been removed by the application of heat. That was done manually by Florgale Group staff. It would take one to two minutes per garment.

716. Florgale Uniform stock in the inventory analysis was valued at $29,417. The Florgale Uniform stock included items peculiar to certain hospitals, such as Monash Medical Centre, which had unique styles and colours. In Burnes' opinion, a 50% discount would be required, because there was not many buyers for that stock.

719. The Baptist Community Services (BSC) stock consisted of navy blue bottoms and three unique blouse fabrics. The Florgale Group had a contract with BCS to be the sole supplier of its corporate wardrobe. In Burnes' opinion, a 50% discount would be necessary, because the line was unique to the Florgale Group. The stock would last between two to three months and an alternative supplier could be arranged for continuity of the range in that time.

722. The Professional Uniform stock range was valued at $620,324. In Burnes' opinion, the buyers would want continuity for the corporate wardrobe. Based on past experience of discounts offered, he considered that a maximum 20% discount on wholesale selling price would be required to sell the stock within a six week period.

725. The Bowls range of apparel was valued at $53,673. It consisted of ladies' bowls frocks sold to specialist bowls wear shops. In Burnes' opinion, a 50% discount would be necessary to sell the stock quickly, as the new bowls season commenced.

728. The Gardner Merchant category consisted of stock for hotel services for hospitals and P & O shipping. In John Burnes' opinion, a maximum discount of 50% would be required to sell the stock quickly.

731. Discontinued styles had a value of $14,943. The items were from the Florgale Uniform or Professional Uniform range. In Burnes' opinion, a 90% discount of the wholesale price would be required, because it was older and there was not a full size range.

734. The Special Central Hospital Contract stock was valued at $17,910. In Burnes' opinion, a 50% discount was required to sell the entire stock within six weeks.

737. The Schools category of stock was the Deakin Nursing School uniform, valued at $8,887. The nurses themselves purchased the stock. In Burnes' opinion (after discussing the stock with Mr Phillips), a 50% discount was required in order to sell the stock quickly.

740. The linen was valued at $32,026. The category included hospital ward and theatre linen. It was very specialised stock. In Burnes' opinion, a 15% discount was required to sell the stock within six weeks.

743. The Medipant stock was valued at $48,278. It comprised incontinence care products purchased by linen services and nursing homes. John Burnes considered that a 15% or 20% discount was required to sell the stock within a six week period.

746. The plain shorts category was valued at $48,278, and comprised plain football shorts without a logo. There was a mail out list and a buying list with about 400 sports stores throughout Victoria, some of which bought plain shorts, and a contract with the Victorian Country Football League. In Burnes' opinion, a discount of 50% would be required to sell the shorts within a six week period.

749. Cricket trousers were valued at $502. In Burnes' opinion, a 50% discount was required in order to sell the stock within a six week period.

752. Melbourne and Sydney seconds were valued at $2,215. In John Burnes' opinion, a 90% discount would be required to sell the stock within a six week period. The category consisted of discontinued styles placed in retail shops in Sydney and Melbourne.

755. Frankston stock was valued at $11,187. Although owned by the Florgale Group, it was not all Florgale Group merchandise. In John Burnes' opinion, a 50% discount would be required in order to sell the stock within a six week period.

758. Crimpelene fabric had a value of $61,000. In Burnes' opinion, a 20% discount would be required to sell it within a six week period. He believed that the VAFA would have purchased the fabric to enable another manufacturer to make the shorts in time for the 1999 football season.

761. The hospitality category was valued at $5,111. It consisted of fabric used for Gardner Merchant and P&O shipping. There was a small amount of stock. Burnes estimated that a 50% discount would be required to sell the stock to existing customers within a six week period.

764. "Mirrorcord" fabric was valued at $16,457. In Burnes' opinion, a 20% discount would be required to sell the stock within a six week period.

767. The "Metro" stock consisted of polyester cotton fabric valued at $5,475. In John Burnes' opinion, a 75% discount would be required to sell the stock within a six week period.

770. "La Mer" fabric was valued at $24,872. It was used to make culottes, skirts, shorts and slacks. In John Burnes' opinion, a 20% discount on the mill price would have been required to sell the stock within a six week period.

773. Polyviscose fabric was valued at $412,383. In John Burnes' opinion, a discount of 20% was required to sell the stock within a six week period.

776. Shirting fabric was valued at $70,967. It was the fabric for blouses and came in twelve different patterns. In John Burnes' opinion, a discount of 20% was required to sell the stock within a six week period.

779. "Classic stock" fabric was valued at $6,992. It was obsolescent. In John Burnes' opinion, a 75% discount was required to sell the stock within a six week period.

782. Sheeting fabric was valued at $27,000. It was used to manufacture hospital linen. In John Burnes' opinion, a 15% discount was required to sell the stock within a six week period.

785. Miscellaneous stock fabric was valued at $135,000. In John Burnes' opinion, a 75% discount would have been required to sell the stock within a six week period.

788. The final category of uniforms WIP ("work in progress") was valued at $40,000. The uniforms would have to be completed in order to sell and some labour costs would be incurred. In John Burnes' opinion, a 50% discount was required to sell the stock within a six week period.

791. In John Burnes' opinion, a maximum of five sales staff members would have been required to sell the stock in this way, and one accounts receivables employee. He considered that the salary of three employees would have been $900 each per week, and $450-$500 each per week for the other three.

794. If Mr Burnes' estimates were accepted, a six week closing-down sale at a discount of the Florgale Group made-up stock would have realised approximately $870,000 and materials would have realised approximately $490,000, as opposed to the $100,000 received for the same stock disposed of by the receiver by auction and pre-auction sales.

798. In support of the contention that the existing customer base should have been contacted in order to realise the market value of the stock, the plaintiffs called a number of customer witnesses to demonstrate that their demand for the stock would have led to significant purchases and higher proceeds.

801. The Florgale Group's customer base included over 400 customers. Mr John Burnes estimated the customer base to comprise between 400 and 600 businesses. Eleven customers were called by the plaintiffs. Eight represented small businesses and three were estimated by John Burnes to be one of the Florgale Group's top ten customers.

804. All of the customer witnesses gave evidence that they would have bought, or would have considered buying, stock at a discount, provided that it was the precise stock they required and depending upon a number of other variables, such as price, availability of funds, and the quality and condition of the stock.

807. The detailed records of the composition of the stock sold at auction were contained on a computer disc which was lost while stored at Bird Cameron. There is now no means of establishing whether any particular stock, whether garments or fabric, in which the customer witnesses had an interest, was included in the stock sold at or prior to auction, or if so, whether it was of a quality or condition satisfactory to the customers.

810. The three witnesses representing one of the ten largest clients of the Florgale Group were: Southern Health Care, Warrigal Centre Linen and Victorian Amateur Football Association (VAFA). All three of those organisations are based in Victoria, two of them in Melbourne.

813. Mr Barrett was the manager of Environmental Services for the Royal Hobart Hospital. The Royal Hobart Hospital purchased approximately $100,000 worth of linen per annum from the Florgale Group between 1995 to 1998.

816. Mr Barrett was aware that Florgale Group had "gone bust" in early November 1998. He stated that he was not contacted by the receivers or any member of the receiver's staff, and was not notified of the auction. Mr Barrett usually dealt with John Burnes at the Florgale Group.

819. In his witness statement, Mr Barrett stated that he would have been extremely interested in purchasing Royal Hobart Hospital uniforms and linen, and would have purchased $80,000 to $100,000 worth of stock, expecting a 15% to 25% discount.

822. He had no substantial experience of buying in an insolvency situation and conceded that any decision to purchase stock would have been dependent on a number of factors, including his budget. He could not assert how much stock he would have bought. There was no evidence that any of the stock, linen or fabric he would have been interested in was available at the auction.

825. Mr Crotty was the general manager of Warrigal Linen Service. Warrigal Linen Services purchased stock from the Florgale Group to the value of about $200,000 to $500,000 per annum, including hotel towelling and sheeting and surgical linen, surgical drapes, towels and gowns, which it rented to hotels and hospitals. Mr Crotty became aware in late November or early December that the Florgale Group was in receivership. He checked to see whether Warrigal Linen had any outstanding orders with Florgale Group. It did not. He realised that his organisation would have to seek another supplier.

828. Mr Crotty was not contacted and advised of the availability of stock or of the auction. He would have been "extremely interested" in purchasing the particular stock that Warrigal Linen Services required, at a reduced rate. Although aware of the receivership, he took no steps to contact the Florgale Group "because I felt they had enough on their plate as it was". Mr Crotty usually dealt directly with John Burnes.

831. Warrigal Linen Services was listed in the Yellow Pages, but Mr Crotty testified that he did not receive a flyer advertising the auction. The stock he would have purchased depended on what was available and the discount offered. There was no evidence that the stock he was interested in was available.

834. Ms Douglas was manager of a retail outlet trading as Workwear Alice Springs. She testified that she was aware of the receivership. Ms Douglas was in "quite regular" contact with John Burnes. Her business purchased culottes, shorts and blouses.

837. She became aware of the receivership, but did not contact the Florgale Group. She was notified of the auction. She testified that she would have wished to purchase stock at a discount in the styles her business carried. She was particularly interested in culottes. Her purchases would have depended on whether the particular styles, sizes and colours she required were available.

840. She testified that she would have come to Melbourne for the auction. Any decision to purchase was dependent on a number of factors. She acknowledged the issue of risks, absence of warranty, and inability to return stock, as well as the need for cash to purchase the stock. She testified that continuity of supply was an important factor. There is no evidence that the stock which she was interested in, including culottes, was available at auction.

843. Ms Ferrier was the manager of a business trading as The Uniform Shop in Townsville. The business principally purchased hospital uniforms from the Florgale Group. Ms Ferrier regularly ordered navy culottes to sell to nursing staff. She gave evidence that she was contacted by a Florgale Group staff member, whose name she believed to be Sharon, and informed that the business was in receivership. She was not notified of the auction. Had she been aware of the auction, she would have bought all the available navy culottes and blouses, and some other styles of stock. She had standing orders for navy culottes which had not been filled, as the item had been unavailable since October 1998. It was for that reason that Ms Ferrier telephoned the Florgale Group in October and was "fobbed off". Subsequently she was informed by an unidentified person that her order might eventually be filled and that the Florgale Group was in receivership. There was no evidence that the stock Ms Ferrier had ordered, or was interested in, was available at auction.

846. Mr Fraser, a director of State Apparel, a business based in South Australia, gave evidence that he provided uniforms to various organisations, including corrections services. He was in regular contact with John Burnes and met him while in Melbourne in September 1998. Burnes subsequently telephoned Mr Fraser and told him that receivers had been appointed to the Florgale Group. Mr Fraser was not offered the opportunity to purchase stock and was not notified of the auction. Had the stock he supplied to his clients been available, Mr Fraser would have contacted his major clients to ascertain their demands. He would have been prepared to buy at least $100,000 worth of such stock at a discount.

849. Mr Fraser stated that John Burnes told him in September 1998 that the bank was encouraging him to achieve greater stock turnover of Coles uniform stock, but that the "roll out" was too slow and turnover insufficient. Mr Fraser could not say whether his staff had any contact with the Florgale Group in November or December 1998 or whether there were any outstanding orders. Mr Fraser did not follow the matter up, due to business and the approaching Christmas break.

852. Mr Horin was the manager of businesses which provided corporate uniforms to clients in the hospital and hotel sectors. They purchased stock to the value of $50,000 per annum from Florgale.

855. He was informed of the Florgale Group sale by an ex-staff member, but could not remember details. He was not invited to buy stock or to make an offer for it. Had he been invited, he would have been interested in buying discounted stock more cheaply, to fill his contracts. He would have spent at least $10,000 if the relevant stock were available. He would also have been interested in particular fabric had it been available.

858. John Burnes was normally his initial contact. He had a good relationship with both Messrs Burnes. Mr Horin did not recall making any inquiry as to what would be sold at auction, as it was a busy time of year.

861. He could not remember what had happened, other than that he took no positive steps and did not get around to it. He could not recall receiving a flyer. Mr Horin's businesses ordinarily did not carry any stock at all and it would be unusual for them to hold stock. He realised that an alternative supplier would have to be obtained.

864. Mr Hickling was the director of a business which supplied nursing uniforms. The business purchased approximately $30,000 worth of stock per annum from the Florgale Group.

867. Mr Hickling learnt of the receivership. His evidence was that he telephoned the Florgale Group and spoke to an unidentified person about spending approximately $50,000 on stock in which he was interested at the right prices. He told the person he would come over to inspect the stock and would pay cash. The person informed him that he was welcome to attend the auction. In his witness statement Mr Hickling stated he did not attend, as he received a document (which was neither the auction flyer nor the catalogue) from which he concluded that there would be no point in attending, as he was interested only in purchasing particular items of stock. At trial, however, he stated that his decision not to attend was principally made on being told by the unidentified person that stock would be bundled up so that there was no opportunity to buy size ranges. Mr Quin did not recall any conversation with Mr Hickling. He testified that had a potential buyer expressed an interest in inspecting stock, his probable response would have been to invite him to do so.

870. There were a number of uncertainties and inconsistencies in Mr Hickling's evidence, and no document advertising the auction other than the catalogue or the flyer has been identified. I am unable to place much weight on his evidence.

873. Mr O'Callaghan was part-time property officer of the VAFA, which purchased approximately $100,000 worth of stock per annum from the Florgale Group. In November 1998, David Burnes informed him of the receivership. On being asked if stock were available for purchase, David Burnes stated that he could not sell any, as the business was in the hands of the receiver. Mr O'Callaghan was not notified of the auction or contacted again. He would have been interested in buying football shorts and the fabric used to manufacture them. Mr O'Callaghan assumed that because David Burnes did not contact him, there were no shorts available. At trial, he testified that he would only buy stock he could sell. The VAFA only made shorts to order, and would purchase only shorts of a particular style and colours which it sold on commission to raise funds. It held only modest quantities of stock.

876. Mr Prowse was the chief executive officer and director of nursing of Vaucluse Hospital, which purchased linen and uniforms from the Florgale Group. It spent an average of $25,000 per year. Mr Prowse testified that he was not contacted and informed of the receivership and was not notified of the auction. He would have purchased up to $50,000 of "our product in our lines, if it was available ... ". A flyer did not come to his notice. The Vaucluse Hospital received The Age, but Mr Prowse did not read it. There were no dealings between the Florgale Group and the Vaucluse Hospital from October 1998 until early January 1998.

879. Mr Whitmee was employed by Monash Medical Centre as Director of Supply. From 1991 to 1998, Monash Medical Centre purchased staff uniforms to a total value of $1,484,224 from the Florgale Group.

882. Mr Whitmee did not recall any contact with the Florgale Group between 5 November 1998 and 15 December 1998. He did not see an advertisement of the auction. He was not contacted about the proposed auction. He would have been interested in purchasing Southern Health Care Network uniforms or fabric, although he could not say what quantity. That would depend on what was available, including size, what Monash Medical Centre held in stock, the price and the available funding. He did not know what communications had occurred between his staff and the Florgale Group, but would expect to be informed of any notification.

885. Mr Whitmee did not know what stock he had on hand during the relevant time, nor what stock Florgale Group had and "the match of those two would determine the requirement".

888. Ms Gabel was a partner in a corporate uniform apparel business in Queensland. She gave evidence that the styles the business purchased depended on her clients' needs. She became aware that the Florgale Group was in receivership, probably in December 1998. She was not notified of the auction. She would have contacted her clients to ascertain whether there was any interest amongst them for the styles available at auction and would have purchased very popular items, to take advantage of a cheaper product. She would only have bought stock which she was using all the time, as she planned to move stock quickly.

891. The defendants submitted, correctly, that there was no evidence to establish that the particular stock in which the customer witnesses were interested was available for sale at or immediately prior to auction.

895. Orders denied that the six week closing down sale at a discount advocated by John Burnes had been proposed during the receivership. He testified that, in any event, such a strategy was commercially unrealistic, naïve and extremely "high risk". Further, Orders considered that the Florgale Group did not have the capacity to undertake the exercise. His reasons can be summarised as follows.

(a) The Florgale Group had only three people working in the despatch area prior to closing down the business. They had handled stock with a book value of $348,000 during the period from 5 November to 10 December. However, in order to sell the entire volume of the Florgale Group stock, with a book value of over $1,500,000, a larger number of people would be required. A great deal of administration, invoicing and despatching would be required in order to process the proposed volume of stock. With reduced staff, it would be impossible. Although manufacturing staff would be terminated, it would be necessary to employ more people in despatch and administration to record the sales, collect the revenue, handle despatches and invoicing and deal with packaging and return of faulty stock.

(b) It is difficult to employ, retain and motivate staff during a receivership or liquidation.

(c) The circulation of flyers advertising discounts would raise an expectation of a discount from the flyer price and would have an adverse impact on net return, which was the central consideration, rather than gross sales.

(d) The Florgale Group's sales were seasonal. The proximity of the December/January period meant that sales would be lower than usual. Customers were unavailable or on leave and it was difficult to hire and retain staff during the holiday period.

(e) Orders had already offered discounts of an average of 47% (or thereabouts) but had still sustained losses while trading during the receivership. While trading on, manufacturing had continued and that had been the profitable area of sales. The Florgale Group's trading history did not indicate that the strategy of sale of the entire stock at a 50% discount could be achieved. He did not consider that it would be possible to sell all the stock at auction.

Expert Evidence

901. Mr Wallace-Smith, a chartered accountant, liquidator and experienced insolvency practitioner, gave expert evidence on behalf of the defendants.

904. Mr Wallace-Smith was an impressive, consistent and credible witness. He gave evidence in relation to the strategy proposed by John Burnes. He concluded that even in a non-insolvency situation, Burnes' proposal and discounting ranges appeared unrealistic and optimistic. Further, Burnes' proposal was "seriously incomplete". Before such a proposal could be entertained, further information and demonstration of realistic realisation and expenditure estimates would be required.

907. Mr Wallace-Smith limited his observations to manufactured stock only.

910. He stated that Mr Burnes' "proposed discounts appear optimistic, given that competitors and customers may be aware of the need to sell all stock within a six week period, with customers of branded goods, in particular, at an advantage in obtaining stock at significantly reduced prices." He noted that the overall realisation was also highly sensitive to the discount applied, so that a marginal change to the discount would have a material impact on the value realised for the goods and on overall alleged net realised funds, due to the relative magnitude of the book value of manufactured goods.

913. Mr Wallace-Smith also observed that the proposal depended upon the capacity to sell the entire stock on hand within a six week period. He estimated, however, that at least six to nine months would be required to sell the relevant volume of stock in November 1998, including a marketing campaign and follow up.

916. He noted that a labour force would be required, which would entail "wages for sales, handling, distribution and administration staff, on costs, including superannuation and leave entitlements, transport and contracting cost, insurance and utility expenditure. Additional expenditure would also be required for the collection of debtors and advertising related to the sale of goods."

919. He noted that Mr Burnes made no allowance for returns or exchanges, and that ordinarily, the most marketable stock would be sold first. A bulk sale or auction could be necessary to sell remaining stock. Customers may have found alternative suppliers.

922. Mr Wallace-Smith made a number of other criticisms of the proposal, which I do not set out in full. He concluded that "given that the business, despite extended efforts, was never able to be sold, the timing prior to the Christmas period, and trading losses I do not consider it possible to sell 100% of the stock within a six week period, nor prudent to entertain such an incomplete and risky proposal as suggested by Mr Burnes in evidence."

925. The plaintiffs contended that Mr Wallace-Smith did not give firm evidence doubting the discounts proposed by Mr Burnes, but was "cautious and speculative". While Mr Wallace-Smith was a restrained and precise witness, his opinion evidence rejecting the feasibility of Mr Burnes' proposal was, in my view, firm, reasoned and convincing.

928. Mr McVeigh, a chartered accountant, liquidator and experienced insolvency practitioner, gave expert evidence on behalf of the plaintiffs. Mr McVeigh disagreed with Wallace-Smith's assessment that the volume of stock would require a six to nine months' sale period (including a marketing campaign and follow-up). While conceding that it was difficult to say precisely how long would be required, which would depend on the costs to be incurred, he ultimately estimated a couple of months.

931. Mr McVeigh conceded that he had not perused the court books, had "no idea" how many staff were employed as at 25 November 1998, how many despatch staff there were, what the premises were, what the Florgale Group stock was (other than that he understood that it was uniform stock) or what raw materials the Florgale Group held. He had no detailed knowledge of the attitude of the Florgale Group's landlord to its continuing tenure of the premises for the purposes of a closing down sale.

934. He had not calculated how many additional staff would be required to sell the stock. He testified that he would typically employ new staff in order to conduct such a sale.

937. Mr McVeigh stated that he had no actual range of discounts in mind, due to his lack of detailed knowledge of the stock available.

940. Mr McVeigh conceded that if he had been selling discounted stock for a period of time but was only accruing losses, he would "do something about it and that is probably go to auction". He also agreed that attractive stock tended to be first to go and, as the process continued, "hard core" unattractive stock remained.

943. Mr McVeigh appeared somewhat defensive during the course of cross-examination on this topic. He gave evidence that he would employ methods of realisation which would carry on through Christmas and the New Year. He contended that he was able to estimate the time necessary to dispose of the Florgale Group's stock without detailed knowledge of the stock itself, premises or staffing levels, or discounts. That was on the basis that "you can dictate the time in which you can sell it in any event. Because you have set yourself a fixed period of time to achieve a result. If you are not achieving a result then you change the mode of sale, and, ultimately, you might say that [you] will send the rats and mice to auction."

947. Given Mr McVeigh's lack of detailed knowledge of the relevant factors, and the vagueness of significant aspects of his assessment, I was not persuaded by his opinion on the feasibility of a closing-down sale.

950. Mr Burnes' opinion that the manufactured stock could have been sold for over $800,000 and the fabric for over $400,000 within six weeks is not readily reconcilable with the course of conduct in fact adopted by the directors in the period leading up to the appointment of the voluntary administrator upon the apprehended insolvency of the Florgale Group.

953. When asked in cross-examination if it were "possible realise the sums of money that you are now talking about in six weeks, why didn't you do it?" Mr Burnes was unresponsive. He stated "Because the first step was I had to appoint a VA. Then I could sell the stock." Mr Burnes nevertheless conceded that, while recognising the importance of reducing the stock holdings prior to the appointment of the voluntary administrator, he had been unable to do so.

956. His evidence on the closing down sales appears inconsistent with his estimate of value in the Form 507.

959. It is also inconsistent with the fact that Burnes was offered, and accepted, a commission to sell stock at anything above estimated auction value, but failed to sell anything. I did not accept the explanation advanced by Mr Burnes for his failure to do so.

962. Further, the evidence is inconsistent with my findings that the receiver directed staff to seek and conclude sales, including sales at a discount, and, when offers to purchase at a discount were received, sought the Messrs' Burnes' recommendation.

965. I am not satisfied that, during the receivership, either of the Messrs Burnes recommended a large discount sale as preferable to the course in fact being pursued by the receiver, or proffered a developed strategy. No documented strategy was advanced and I have rejected the Messrs Burnes' evidence that they made oral recommendations to that effect.

968. Although eleven customer witnesses gave evidence of what they would buy, or would consider buying, at various discounts, there is no evidence that the particular stock they would have bought (or considered buying) was in fact included in the stock available for purchase.

971. I am satisfied that, as indicated by the Quick Evaluation Report and conceded by Mr Burnes, the stock had not been easy to reduce and the Florgale Group's levels of stock had for some time been, and were, too high. Messrs Orders, Wallace-Smith and McVeigh agreed that the most desirable stock would typically be the soonest sold.

974. Further, irrespective of whether his estimates of discounts were correct, Mr Burnes' proposal for a six week closing-down sale of the entire stock was viewed as impractical and high-risk by Messrs Wallace-Smith and Orders, whose evidence on that matter I accept.

979. Mr Wallace-Smith testified that in realising assets, he would sometimes obtain a valuation of stock, depending on its type, and would at least attempt a stock take, depending on circumstances. He would sometimes, but not always, rely on staff expertise.

982. He stated that the assessment of the best way to realise stock would depend on the detailed circumstances, including how long the receiver intended to trade, whether the stock would be part of a sale and the realisation strategy for any balance left unsold.

985. Mr Wallace-Smith agreed that in weighing up the relative benefits of sale to the existing customers, as opposed to auction, he would prepare some calculations to consider the cost of auction, staff requirements, estimated revenues from sale to customers, and trading history. He would consider discounts, would speak to staff and would consider the quantity of stock. He would also consider staff numbers, rental and utilities. Mr Wallace-Smith did not agree that the analysis, which would vary from case to case, would necessarily require a spreadsheet. He stated that that would depend on how complicated the matter was.

988. He stressed that the cost and potential losses which could be incurred over the sale period must be taken into account, including interest foregone and the receiver's costs.

992. In his witness statement, Mr McVeigh stated that a receiver's usual practice in relation to the sale of stock is to engage a valuer to value plant, equipment and stock, conduct a stocktake using his own and the company's staff, inspect stock either personally or using his own experienced staff, and discuss the best way of realising stock with the staff.

995. Upon deciding not to continue with manufacturing in relation to logoed stock, a receiver would advise customers that the stock is available at a discounted price against normal purchase price. He would consider the removal of the logo, including the cost of removal and the realisable value of the item with the logo removed.

998. In relation to specialised but non-logoed stock, the receiver would "advise the normal customers that the stock is available at a discounted price against the normal purchase price.

(iii) If there is a poor reaction to the offer above in respect of logoed and non-logoed stock, approach competitors asking for offers on the stock.

(v) Consider placing the stock with a competitor on a consignment basis.

1005. In his witness statement, Mr McVeigh stated that a receiver would auction the special purpose stock only if he had explored the market and had failed to obtain a realisation price in excess of the estimated auction sale price. Except in unusual circumstances, a receiver of a clothing manufacturer would expect auction realisation price to be the lowest of any realisation process.

1008. Mr McVeigh agreed that the receiver's ultimate objective was to maximise the return to the secured creditor. In selling stock, a receiver would always consider both the benefit and the cost of the various methods of realisation. A receiver would have regard to costs of sale, including staff, premises, telephones, advertising, marketing and the costs of the receivership itself during any trade-on period.

1011. Mr McVeigh stated that if the receiver anticipated that the costs of achieving sales by trading on would exceed the returns, the prudent course would be to close the business and use some other form of realisation.

1014. He agreed that it would be necessary to consider how long it would take to achieve the sale of the entire stock and the financial ramifications of running the business for that time.

1017. He agreed that, provided that existing sales and marketing staff and former proprietors of the company were co-operative, it would be appropriate to use their services. It would also be appropriate, when selling stock at a discount, to refer to the former proprietors for advice and concurrence. The receiver would expect the former proprietors of the business to bring to his attention any sales opportunities of which they were aware.

1020. He agreed that the confidence of the customer base in relation to continuity of supply was eroded by appointment of a receiver. Further, competitors typically exploited the opportunity to secure additional clients.

1024. Mr Orders testified that on closing the business on 25 November 1998, he did not contemplate a closing-down sale at a discount to customers, because, in his view, the approach of sale to customers at a discount had already been attempted. He agreed that the appropriate course for a receiver of special purpose stock would be first to attempt to approach the customer base whilst trading on. He conceded that auction was a last resort for the realisation of special purpose stock. However, he asserted that auction would be appropriate (albeit while selling up to the auction date) once the decision had been made to cease trading, if, during the trading process "you can't sell it to your customers and you can't sell it to competitors", provided that there were no buyers for the business.

1027. In deciding to conduct an auction, he did not do a spreadsheet analysis comparing auction with the proposal advocated by the plaintiffs (that is, dismissing all manufacturing staff and using a "slimmed down" sales staff to attempt to sell the entire stock to the customer base - "like a telethon".) Mr Orders testified that he did not produce budgets to evaluate that option, because, he considered it commercially unrealistic without the need for further investigation. He considered that the large scale closing down sale proposed by the plaintiffs would lead to greater losses.

1030. He stated "On 25 November I knew I was offering large discounts and I knew I was incurring trading losses, therefore I did not pursue any strategy that involved that". Although the losses included the wages of manufacturing staff (who would be dismissed in the scheme proposed by the plaintiffs) the manufacturing was profitable and the termination of manufacturing would lead to a corresponding drop in revenue.

1033. The plaintiffs argued that Orders' explanation for his failure to prepare budgets and detailed spreadsheets evaluating the comparative advantages of a large closing down sale at a discount to existing customers over a six week (or similar) period should be rejected, because it depends on his assertion that his experience of selling to the customer base at a discount and incurring losses justified the view that investigating the option was pointless. The plaintiffs challenged that assertion.

1036. The plaintiffs argued that Orders was not selling at a discount to customers prior to the decision to close down on a scale which would justify that conclusion. Accordingly, they argued that there was a breach of duty in relation to process. Mr Collinson, however, conceded that low sales did not establish that Orders did not instruct staff to seek and attempt sales, albeit with limited success.

1039. For the period 5 November 1998 to 4 December 1998 (broadly equivalent to the trade-on period) sales to a total amount of $158,000 were made. Those sales included sales at a discount. Mr Orders calculated that the average discount was 47% and that the cost of sales, on the basis of the Florgale costings of wholesale price less 20%, was $299,055. Given that double the number of staff had previously sold an average of $550,000 per month, he regarded that as a significant amount of sales.

1042. Further stock was sold between 4 December 1998 and the date of auction.

1045. In cross-examination, Mr Orders conceded that in fact he had used a conservative costing of the wholesale price less 30%, which meant that, more accurately, the cost of stock sold during the relevant period was $348,017 within 22 working days.

1048. The plaintiffs challenged Mr Orders' total of $158,000 for sales, on the basis of calculations submitted by counsel for the plaintiffs, who estimated the sales figure to be about $127,000. It is unnecessary for me to determine which figure is correct. In either case, a not insignificant quantity of stock was sold at a substantial average discount, although it was only a modest proportion of the total stock holding.

1051. Mr Orders testified that he did not understand other calculations prepared to and put to him by counsel for the plaintiffs during the course of cross-examination, which he stated to be inconsistent with recognised accounting approaches.

1054. The plaintiffs contended that during the trade-on period, Orders had expressly prohibited staff, including the Mesrs Burnes, from selling stock without prior written consent and from making contact with any customers or seeking orders. For reasons discussed above, I rejected that contention.

1057. The plaintiffs alternatively argued, that even if sales did occur, Orders did not instruct staff actively to seek sales, was negative in relation to customers and disregarded the Messrs Burnes' advice or recommendations. They asserted that the Florgale Group's staff were not given instructions to try to sell the stock. They also contended that, at best, the receiver responded passively to sales and did not direct or make an active effort to sell.

1060. Orders asserted that he instructed staff actively to seek orders. He testified that he had several ad hoc meetings or contacts with sales staff, in the course of which he told them to seek orders from the customer base and to offer discounts, and if orders were cash-flow positive, they would be completed. He did not believe that he needed to instruct staff on how to contact customers, the best customers to contact or what stock to offer them.

1063. Orders testified that he did not prescribe discounts to staff, but left it to the sales staff, who knew the customer base, to test the market. Staff could conclude sales at ordinary wholesale prices without obtaining approval. He conceded that he would not expect that all customers would be contacted. He stated: "I expected sales staff to contact those people who they believed they could make a sale to."

1066. David Quin could not recall any specific instructions from Orders in terms of what was to be done in selling stock or about trying to sell stock to customers at a discount. He had been instructed to follow the practice of obtaining the directors' sign-off on discounted sales. Orders' and Quin's evidence was that Orders had the principal responsibility in relation to the sale of stock.

1069. Orders testified that the directors never complained to him about the level of sales that were being achieved, never raised the subject of a sales programme or suggested that the sales should be differently handled, never advocated a sales programme in relation to any particular line of stock, never suggested or recommended the removal of logoes, never objected to the auction, and never objected to the grouping of stock at auction.

1072. In the light of all the evidence, including that of the Messrs Burnes and Mr Phillips discussed at paragraphs 173-186, I am satisfied that the receiver and his staff directed the staff and the Messrs Burnes to sell stock if cash flow positive, including sales at a discount, and that a substantial number of such sales in fact occurred. The Messrs Burnes were consulted on, and recommended or approved, sales at a discount. The sales at a discount included sales to Mr John Burnes and to Mr Phillips. Further, on 24 November, John Burnes and a number of other persons were offered the incentive of a 10% commission on any price that they could achieve above the estimated auction price.

1075. The plaintiffs also alleged that Orders did not consider the removal of logoes from logoed stock, which the Messrs Burnes advised. Orders gave evidence that negotiations to purchase such stock were continuing with Bizwear and Yakka until 30 November 1998, and it would have been commercially imprudent to remove the logoes while they remained interested in such stock. When Yakka withdrew its offer on 30 November 1998, he formed the view that the risk of extra costs of removal and cleaning outweighed possible benefits of removal.

1078. I accept Mr Orders' testimony. Mr Burnes' evidence that he suggested the removal of the logoes is at odds with his letters to Norman Jones dated 11 November 1998 and to the NAB dated 12 November 1998. I am satisfied that in the short period between the cessation of interest in logoed stock by competitors and the auction, Orders adverted to the possibility of removal and formed the view he did on reasonable grounds. I am not satisfied that the evaluation required a documented exploration and investigation of the feasibility, costs of removal and estimates of what likely increase in price at auction may have resulted.

1083. The plaintiffs argued that the receiver was liable principally upon the basis of breach of the general law duty of a receiver, supplemented by s.420A and s.232of the Corporations Law. The ambit of s.420A, and in particular, whether it confers any rights upon guarantors and providers of third party security, is discussed below.

1086. Alternatively, the plaintiffs relied on s.423 and s.1324 of the Corporations Law.

1089. The plaintiffs argued that the NAB was liable pursuant to s.79 of the Corporations Law as a person involved in a contravention of s.232 of the Corporations Law and on the basis that the receiver was its agent for the purposes of the conduct constituting the breach. Alternatively, the plaintiffs relied on s.423 and s.1324 of the Corporations Law.

1092. The enactment of s.420A has diminished the significance of a perceived divergence between the approach of English and Australian courts to the general law duty of receivers, with the former espousing an obligation to take reasonable care in exercising the power of sale, and the latter upholding an equitable duty of good faith.

1095. In Cuckmere Brick Co Ltd v Mutual Finance Ltd[2], the English Court of Appeal held that in addition to acting in good faith, a mortgagee, in exercising the power of sale, must also take reasonable care to obtain the true market value of the property and must exercise due care and diligence to avoid selling at an undervalue. The Court of Appeal employed the language and concepts of the tort of negligence. In Standard Chartered Bank v Walker[3], it was held that a receiver owes a duty to both the company and to guarantors of the company's liabilities to obtain the best price possible for the company's assets. In Downsview Nominees Ltd v First City Corp Ltd[4] the Privy Council confirmed that the receiver's obligation is equitable in nature, but adopted the reasoning in Cuckmere.

1098. Despite some instances of endorsement of the Cuckmere test[5], the predominant approach of Australian courts to the general law duty has been to adhere the "good faith" test enunciated in Pendlebury v Colonial Mutual Life Assurance Society[6]; although the question was left open in Forsyth v Blundell[7].

1101. In Pendlebury v Colonial Mutual Life Assurance Ltd[8], Griffiths CJ accepted the rule laid down in Kennedy v De Trafford[9] and applied in Barnes v Queensland National Bank[10] that a mortgagee must exercise the power of sale in good faith[11]. "Good faith" in that context excluded the wilful and reckless dealing with the property "in such a manner that the interests of the mortgagor are sacrificed."[12]

1104. Griffith CJ accepted the proposition that " ... in the case of a sale by a mortgagee, if he omits to take obvious precautions to ensure a fair price, and the facts show that he was absolutely careless whether a fair price was obtained or not, his conduct is reckless, and he does not act in good faith."[13] The question therefore to be determined was whether the mortgagees "looked after their own interests alone" and absolutely disregarded the interests of the mortgagor.[14]

1107. In Pendlebury, Griffiths CJ found that the advertising of a mortgagee's auction was inadequate, as it did not identify the land the subject of the sale in relation to locality, sale type, quality crops, subdivision and irrigation. The advertisement was not placed in a local newspaper, but only in large city daily newspapers.

" ... the object of a sale by auction is to secure a fair price for the property offered by means of competition between probable purchasers. And the object of giving public notice of a sale by auction ... is to bring the subject of the sale to the notice of such probable purchasers, and so to induce such competition as will be likely to secure a fair price. The notice ought, therefore, so far as the circumstances will admit, to be of such a nature, both as to the particulars given and as to the place in which and the mode by which it is given, as to be likely to secure the result. It is not disputed that if a mortgagee sells by private contract he is bound to take reasonable means to ascertain the value before selling, and the same rule applies, in my opinion, to a sale by auction."

1114. His Honour held the mortgagee liable to the same extent, and on the same principles, as an accounting party who is liable for wilful default.[16]

1117. In Forsyth v Blundell[17], the majority held that a mortgagee's power of sale had not been exercised in good faith. In that case, the mortgagee concluded a private sale for the reserve price to a purchaser prior to a scheduled auction. The reserve price was the amount of the mortgage debt. The mortgagee did not inform the purchaser of another party's expression of interest in bidding up to a price higher than the reserve.

1120. Mason J considered that it was a "vexed question" whether a mortgagee had a duty of reasonable care, but found that the mortgagee failed to act bona fide, in that it acted recklessly, "not caring whether the price obtained was, in the circumstances, a proper price or not."[18]

1123. His Honour observed that there was evidence of a genuine interest in the property by the other party, but "knowing that there were two interested potential purchasers, with no reason to think that either was not genuine"[19] the mortgagee did not attempt to bring them into competition. His Honour concluded "I am left with the overwhelming impression that [the mortgagee] determined willy nilly on a sale to Shell for a price which would cover the moneys owing to it, notwithstanding that there was a real possibility of selling at a higher price to XL ... ".[20]

1126. It is established that a mortgagee in exercising the power of sale is liable for the defaults of its agents. Similarly, in Commercial and General Acceptance Limited v Nixon[21], in relation to s.85 of the Property Law Act 1974 (Qld), (analogous to s.420A of the Corporations Law) Gibbs, CJ, with whom Mason, Aickin and Wilson JJ agreed, stated that the duty to take reasonable care to ensure that the property was sold at market value was not discharged simply by delegating the duty to another "whether that other be an agent or an independent contractor".

1129. Relevant authorities indicate that the general law duties of a receiver in exercising a power of sale are analogous to those of a mortgagee.

1132. In the influential decision of Expo International Pty Ltd v Chant (No. 2)[22], Needham J rejected the proposition that a receiver was liable for the negligent performance of bona fide acts. His Honour reaffirmed the centrality of the Pendlebury test of good faith and referred to ANZ Banking Group Ltd v Bandagilly Pastoral Co Pty Ltd[23], in which Jacobs J had stated that bona fides, in the context of the decision to sell, was not:

"... concerned with the motive for exercising the power of sale, but once the decision to sell has been made, it is concerned with a genuine primary desire to obtain the best price obtainable consistently with the right of the mortgagee to realise his security. At the same time the mortgagee is concerned with his own interests and not with the interests of the mortgagor or subsequent incumbrancers, and therefore a wide latitude has been allowed to him in his manner of exercising the power of sale."[24]

1136. The difference between the practical application of the Cuckmere and Pendlebury tests may not have been as significant as their different articulation suggested, given that "good faith" in the context of a mortgagee's sale is recognised to incorporate an obligation to have due regard to obtain a fair price for the security property.

1139. The Australian Law Reform Commission General Insolvency Inquiry[25] nevertheless considered that the general law principles applied in Australia offered inadequate protection.

1142. The Discussion Paper[26] relevantly stated:

"The Commission proposes a new provision containing a clear statement of the duties of a receiver in the exercise of a receiver's powers of management and sale of property of a company (sR7). This proposal is advanced because, in Australia at least, the duty of a receiver would appear to be only to act in an honest and non-reckless manner. A receiver who exercises a power in a negligent manner does not breach that duty. In England, however, the position is otherwise. Recent authorities have determined that a receiver does have a duty to take reasonable care in the exercise of a receiver's powers. If a receiver acts negligently that duty is breached and the receiver is liable. The Commission considers that this should be the law in Australia. However it does not seem that this will be developed by the courts in Australia which have been reluctant to follow the English line of authority. There are theoretical difficulties with the English line of authority. It has been criticised in judgments given by Australian judges for equating the common law action for negligence with the equitable duty which a mortgagee has in exercising a power of sale. Nevertheless, it is desirable that a receiver should be subject to a duty to take reasonable care ... . However, as the Australian cases have thus far held, that accountability cannot be achieved by attempting to impose common law duties on receivers. If proper accountability is to be imposed a legislative base is necessary'.

1146. Following the exposure of the Discussion Paper and draft legislation the final report of the Australian Law Reform Commission General Insolvency Inquiry ("Harmer Report")[27] affirmed its recommendation for an introduction of a statutory duty requiring receivers to take reasonable care in the exercise of their powers and to ensure that the property was not sold at a price below the best price reasonably obtainable.

Section 420A - Position of Guarantors and Collateral Mortgagors

1150. The enactment of s.420A of the Corporations Law in 1993 further diminished the practical consequences of any difference between the Cuckmere test and the general law duty of good faith in the case of sale by the receiver of the property of a corporation. Section 420A introduced a statutory duty imposed upon controllers (including both receivers and mortgagees in possession) which echoes the Cuckmere test.

1153. Section 420A is neither a codification of pre-existing law nor designed to displace it. The requirements of good faith as construed in Pendlebury and like authority co-exist with both the general of duty in ss.180-184 of the Corporations Act 2001[28] and the more rigorous statutory duty imposed by s.420A in relation to the power of sale.

1156. Section 420A of the Corporations Law provided:

"(1) In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:

(a) if, when it is sold, it has a market value - not less than that market value; or (b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold."

(2) Nothing in sub-section (1) limits the generality of anything in s.232.

1164. Section 420A of the Corporations Act is in identical terms to s.420A of the Corporations Law, save that a reference to ss.180-184 is substituted for s.232, the general duty provision of the Corporations Law.

1167. A receiver is a "controller" within terms of s.9 of the Corporations Act 2001 and the Corporations Law, which relevantly provides:

"'Controller', in relation to the property of a corporation, means:

(a) a receiver, or receiver and manager, of that property; or

(b) anyone else who (whether or not as an agent for the corporation is in possession, or has control, of that property for the purpose of enforcing a charge. "

1174. The Corporations Act 2001 came into force on 15 July 2001. It substituted the new provisions for the general duty of directors and officers contained in ss.180-184 for the previous general duty provision contained in s.232 of the Corporations Law. Broadly speaking, the Corporations Law was repealed as from 15 July 2001, but complex transitional provisions apply. In the present case, the plaintiffs' writ was issued in January 2000 and the Corporations Law provisions apply to conduct which took place prior to 13 March 2000. Pursuant to the transitional provisions of the Corporations Act 2001, in such circumstances a new proceeding is taken to have been initiated under the Corporations Act 2001 on the basis of substituted rights and liabilities corresponding to the pre-commencement rights or liabilities. In this context, in effect, the Corporations Act 2001 is to be read as if it contains provisions equivalent to s.232 and the civil penalty provisions, including s.1317HD of the Corporations Law[29] as they existed prior to 13 March 2000, with any necessary modifications.

1177. In the present case, the questions arise whether: (a) s.420A confers any cause of action for damages or other remedy; and (b) if so, whether such a cause of action extends beyond the corporate mortgagor to the guarantors and providers of collateral security for its debt; (c) if s.420A does not confer a right to sue for damages or other remedy, what is its proper construction and effect?

1180. The guarantors and third party mortgagors in this case argue that, but for a breach of duty by the receiver in realising the Florgale Group's stock, sufficient funds would have been realised from its sale fully to satisfy the liabilities to the debenture holder, without recourse to the guarantees and third party mortgages.

1183. The legislation nowhere specifies the consequences of a contravention of s.420A. The section itself does not set out remedies, liabilities or penalties. It does not identify any party on whom a cause of action for breach of the duty is conferred. No general provision of the Corporations Law or the Corporations Act creates a right of action or an entitlement to damages, and no substantive provision relates to s.420A.[30]

1186. The construction and ambit of s.420A were persuasively analysed by Bryson J in GE Capital Australia v Tan Ruth Davis[31]. In that case, the plaintiff financier sued four guarantors for the unpaid balance of a loan made to two companies which were not parties to the proceeding. The individual guarantors controlled the two corporate guarantors and the borrower companies. The guarantors cross-claimed on the basis, inter alia, that they had a private right to bring an action for damages for breach of the statutory duty created by s.420A of the Corporations Act. They argued that the controller failed to take all reasonable care in selling the security property.

1189. Bryson J observed that (in contrast to s.85 of the Property Law Act 1975 (Qld) which, although otherwise in similar terms, expressly conferred a right to damages on a "person damnified" by breach of the relevant duty) s.420A did not expressly confer a right to damages or any other remedy on the corporation or anyone else. It did not, in terms, indicate an intention to protect persons, such as guarantors, who did not have an interest in the property of the corporation[32].

1192. His Honour recognised that whether a statute which creates a duty also creates a remedy for its breach was to be inferred from a range of circumstances.

"There is in my opinion no basis for the view that s.420A, alone or with the aid of context, operates or was intended to operate so as to confer a right to recover damages or any other right to recover damages or any other right to a remedy on guarantors. The sub-section speaks with Delphic simplicity and exemption from interrogation by saying what the controller must do without referring to consequences of failure to comply."

1199. Bryson J nevertheless identified a legislative intention that that the corporation, as mortgagor, was to retain its existing available remedies, tested by reference to the duty in sub-s.420A(1). His Honour stated[34]:

"The effect of s.420A(1) is to redefine the duty and what must be done to protect the corporation and its property when affected by exercise of a power of sale".

1203. Further, he considered that a guarantor was "entitled to rely on the availability to the mortgagor of a remedy", whether the remedy was that under the general law principle of Pendlebury v Colonial Mutual Life Assurance[35], or the remedy now available to the mortgagor on breach of the duty declared under sub-s.420A(1)[36].

1206. The equitable remedies traditionally available to guarantors in their own right (although subject to the terms of the contract of guarantee itself) included a right of subrogation to the rights of the principal creditor and extended, (for the guarantor of a secured debt), to remedies in relation to conduct such as fraud or negligence by the secured creditor in the realisation or management of the security property which resulted in its sacrifice, diminution or unavailability for the benefit of the surety.[37]

1209. In Williams v Frayne[38], Dixon J affirmed the principle that any failure in the performance of a condition in contract of guarantee operates to discharge the surety. He stated: "But otherwise the surety can only complain if the creditor sacrifices or impairs a security, or by neglect or default allows it to be lost or diminished, and in that case the surety is entitled in equity to be credited with the deficiency in reduction of his liability."

1212. In GE Capital, Bryson J concluded that (although the authorities on the remedies available to a guarantor or surety in its own right did not state the tests with great precision):

"These authoritative statements appear to me to have the effect that the surety may complain of anything of which the debtor may complain, and has further rights where the value or realisation of the security has been diminished by the creditor's neglect or default ... If the guarantors show that the mortgagors would, if they made a claim, be entitled to a remedy under sub-s.420A(1), the guarantors are, in my opinion, entitled to a similar remedy by way of an equitable defence to the claim against them, subject to the provisions of the guarantee." [39]

1216. His Honour observed that[40] "the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage account. In my opinion, the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee's duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in sub-s.420A(1)."

1219. Subject to the terms of the guarantee, Bryson J considered that the guarantor would be entitled to have[41] "the correct amount of any credit ascertained and brought into account in calculating the amount of the liability of the principal debtor which in its turn determines the amount of the liability of the guarantor. If the mortgagor is entitled to have a further credit brought into account on taking the mortgage accounts, the guarantor can get the benefit of the credit by relying on an equitable set-off against the creditor's demand. To do so is to rely on an entitlement of the mortgagor to set-off that credit on taking the mortgage accounts. The substance of what the guarantor does by relying on a set-off is establishing the true amount of his own liability by showing that the debtor is entitled to a set-off. Allowing this course tends to avoid multiplicity of proceedings ... "

1222. He considered that although equitable remedies, such as a taking of accounts, would not be usual when security was given over goods, they would apply to interests in valuable goods of a unique character[42].

1225. In Jeogla v ANZ[43], discussed below, it was common ground that s.420A was an appropriate basis for an award of damages, based on the provisions of s 1324(10) of the Corporations Law. An attempt to revisit on appeal the question whether s.420A could lead to an award of damages was rejected by the Court of Appeal[44].

1228. In Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgagors) Pty Ltd[45], Campbell J held that a prior encumbrancer was entitled to an account, and also to payment under s.423 of the Corporations Act 2001, of the amount of loss it sustained by reason of a breach of s.420A by the defendant which, as holder of the first and second mortgages, had sold the mortgaged property at public auction following the mortgagor's default.

1231. In Duggan v Thomas and Commonwealth Bank[46], Stone J accepted, in reliance on Artistic Builders, that s.423 of the Corporations Act allows the court, after due inquiry, to impose a remedy, including an order that the mortgagee pay to the complainant the amount of the loss sustained by reason of the mortgagee's breach of its statutory duty under s 420A[47].

1234. Bryson J in GE Capital observed that although the plaintiffs in Artistic Builders had relied on s.423 without objection, a trial of a proceeding should not readily be interpreted as an inquiry under s.423 or as opening the possibility of remedies by such order as the court might think fit, unless it is clear from the outset that such an inquiry is being undertaken and that there is a claim for the exercise of the court's power to grant remedies[48]. He considered that although s.423 conferred wide powers, save in clear cases, s.423(1) should not be pressed "into service to extemporise procedure and remedies against controllers of the property of corporations"[49].

1237. Bryson J also rejected the contention that where the litigation did not raise the prospect of the grant of an injunction restraining breach of s.420A, damages under s.1324(1) should not be awarded[50].

1240. In Ultimate Property Group Pty Ltd v Lord[51] Young CJ in Eq. echoed Bryson J's reservations on the applicability of ss.423 and 1324(1) of the Corporations Act. He also concurred with Bryson J's analysis that the effect of s.420A was to substitute the statutory test of liability for the traditional test when determining whether the mortgagee had breached its equitable duty in relation to the exercise of the power of sale.

1243. Young CJ endorsed the view that guarantors may take a benefit from the accounting between mortgagor and mortgagee, either by way of equitable set-off where, for example, the creditor sues the guarantor[52] or pursuant to the principles recognising the rights of guarantors where the principal debtor has acted so as to diminish the value of the security.[53]

1246. His Honour recognised "force" in the submissions that s.420A was not intended to confer rights, but rather to control controllers. He observed that the drafting history of the legislation pointed to a deliberate omission of a right of action. However, while he observed that the Corporations Act was "odd", in that it contained no overall provision for the enforcement of duties, he considered that "it would be a complete nonsense to say that s.420A was inserted into the Corporations Act with no consequences at all ... "[54]

1249. He concluded that the section was intended to confer a private action. [55] He stated:

"In my view the breach of s.420A gives rise to an action for equitable damages in the same way as there would have been an action to recover surplus proceeds of sale in equity where the mortgagee had wrongly sold the property contrary to the Pendlebury rule. This is much the same conclusion that Bryson J reached in the GE Capital case."[56]

1253. Despite the similarity of his approach to s.420A, Young CJ in Eq appeared to accept that the section operates to vest a cause of action, whereas Bryson J considered that s.420A only contributed stringency to pre-existing rights of action, rather than creating independent new causes of action.

1256. In my opinion, Bryson J's analysis of s.420A is persuasive. The Australian Law Reform Commission General Insolvency Inquiry[57] recommended that a guarantor should be able to bring an action for breach of the statutory duty it recommended but the recommendation was not reflected in the legislation. The section does not vest an independent cause of action, but extends the duty owed by a controller, with the effect that all existing entitlements (including those of guarantors and collateral mortgagors) to equitable remedies in respect of a faulty or deficient exercise of the power of sale are enhanced and strengthened, by reference to the higher duty established by s.420A.

1260. Section 420A(1) incorporates the difficult concept of property which, although sold, has no market value. In Ultimate Property Group Pty Ltd v Lord, Young CJ in Eq. examined that issue by reference to its legislative history.

1263. His Honour noted that the Discussion Paper of the Australian Law Reform Commission General Insolvency Inquiry[58] proposed legislation to be inserted in the then Corporations Law as s.324B as follows:

R7(1) It is the duty of the receiver of property of a corporation to take reasonable care in the exercise of the powers of the receiver.

(2) In particular, it is the duty of the receiver to take reasonable care in the management of the property and, if the property is sold, to ensure that it is not sold at a price below its market value.

(3) An agreement is void to the extent that it purports to relieve, or might have the effect of relieving, the receiver from his or her duty as mentioned in subsection (1) or (2).

(4) If a corporation or some other person has suffered loss by reason of a breach of duty as mentioned in subsection (1) or (2), the corporation or person may bring an action for damages against the receiver'.

1271. However, the Harmer Report[59], while adhering to its recommendation of a statutory duty requiring, in particular, receivers to take reasonable care in exercising the power of sale, doubted that it was wise to employ the phrase `market value'. It proposed an alteration to the earlier draft, in the following terms[60]:

`In particular, that duty extends to taking reasonable care in the management of the property and, if the property is sold, to ensure that it is not sold at a price below the best price reasonable obtainable'.

1275. The covering memorandum of the exposure draft of the Corporate Law Reform Bill 1992 echoed the Harmer Report's terminology in the following comment[61]:

"Receivers, chargees in possession and their agents have a duty to take reasonable care in exercise of their powers, and in particular, in relation to the sale of the company's assets".

`In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold'.

1283. The Bill was introduced into Federal Parliament on 3 November 1992. The Explanatory Memorandum dealing with proposed s.420A stated[62]:

`Proposed section 420A will make it clear that, in selling company property, a controller ... must take all reasonable care to sell the property for its market value ... . The controller's duty under proposed subsection 420A(1) will be owed to the company'.

1287. Section 420A(1) in the draft Bill that accompanied the memorandum was in identical terms to subsection (1) of that section as passed.

1290. Having reviewed the above history, Young CJ in Eq. stated[63]:

"It will be seen that there is a complete departure from the text recommended by the Law Reform Commission and that legislature has deliberately moved from the position taken by the Commission of omitting reference to market value and the problems that that term was envisaged to bring about and has reinstated it despite what is in the actual text of the covering memorandum. I wondered for quite a while why this has happened. My own research suggests that what must have happened is that the Parliamentary Counsel looked at s.345B of the New Zealand Companies Act 1955 which had been added in 1980. The section did not survive the rearrangement of New Zealand company law in 1993 but is now to be found as s 19 of the New Zealand Receiverships Act 1993. As at 1998 the section read, so far as is relevant: `(1) A receiver or manager of the property of a company who sells any of that property shall exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale. (2) The duty of a receiver or manager under subsection (1) of this section shall be a duty owed to the company'. We there see the phrase `all reasonable care' which has come into the Australian section, though the New Zealand section uses the words `best price reasonably obtainable', whereas the Australian section uses in most circumstances the test of market value if the property has a market value, otherwise uses the New Zealand test."

1294. As Young CJ in Eq. observed, the exposure draft of the Corporate Law Reform Bill 1992 referred to "the best price that is reasonably obtainable having regard to the circumstances in existence when the property is sold" thereby appearing to accept the recommendation to avoid a reference to market value. The Bill, however, contained s 420A as passed.

1297. The peculiarity of a concept of a property which, although sold, has no market value, has been noted in numerous authorities.

1300. In National Transport Insurance Ltd v Smith[64], Hunter J stated "It is very difficult to conceive a situation where a property does not have a market value, as distinct from a known market value which may only be ascertained on sale. It is for this reason that I think the section should be treated as providing in sub para (b) for the situation where there is no known market value".

1303. In Jeogla v ANZ, Einstein J observed[65] "that the concept of absence of a market value is difficult to grasp" and questioned "how does one sell for more or less than the market value if the sale takes place in the market." His Honour considered that the reference to "market value" and "best price reasonably obtainable" imposed objective standards[66]. He relied on the definition of "market value" enunciated in Spencer v The Commonwealth[67], which depends on a willing but not anxious vendor and purchaser, not in a forced or fire-sale context deciding on disposal at discounted prices because of some immediate need to liquidate assets.

1306. In Skinner v Jeogla[68], Spigelman CJ considered that reliance on the definition of market value in Spencer v The Commonwealth would mean that most property would have a market value and that, in consequence, s.420A(1)(b) would have little, if any, work to do, being limited to an exceptional case of property with only a single buyer, such as landlocked real estate.

1309. His Honour considered that the two paragraphs of s 420A(1) "are intended to be both exhaustive and mutually exclusive. He rejected an argument that the two limbs were "true alternatives" in the sense that s 420A(1)(a) articulated a duty which was generally applicable, and s 420A(1)(b) articulated an alternative duty which will have application in some circumstances[69].

1312. Although the reference to "market value" in s 420A(1) was unexplained, his Honour stated that "nothing in the legislative history would suggest that para (a) was intended to have so dominant, if not exclusive, a role"[70].

"Einstein J does not indicate that his research has discovered any aspect of the consultation process which might have led to the addition of para (a). Nor was any such material or explanation proffered in the written submissions filed in these proceedings. In the events that have happened, the court has not found it necessary to pursue the question. Suffice it to say that this legislative history is not such as to give support to a construction of the subsection that would give overwhelmingly dominant practical application to para (a). The central difficulty in the construction of s 420A(1) is that it is premised on the basis that there is a category of property that is in fact `sold' but which has no `market value'. This incongruity is enough to indicate that a very particular concept of `market value' is being employed. The construction favoured by Einstein J was to the effect that the words `market value' meant that a value was, in effect, ascertainable. Two alternative constructions suggest themselves as reasonably arguable. First, that `market value' means a definite value. Second, that `market value' means a readily determined value. By `definite value' I mean a value that is clearly and obviously established as a market price. By way of example, a small parcel of shares in a company listed on the Stock Exchange has a definite market value which can be ascertained at any point of time simply by looking up a document. Shares in a company which is not listed do not have a definite value in this sense. By the alternative of `determinable value' I mean to refer to property for which the number and nature of comparable sales, and the closeness of the degree of comparability, is such that at any point of time a market value can be readily determined. This is in contrast with property which has so unique a quality that comparisons cannot readily be made, or is so scarce that sales are rare. It is not necessary to choose between these alternatives for present purposes. It is sufficient to indicate that the alternative constructions are reasonably arguable. Each is capable of having a relevant application in the present case. The `definitive value' construction would mean that his Honour erred in assessing the case only on the basis of s 420(1)(a). Similarly, a case could be made that the quality of the cattle on Jeogla Station, with over a century of careful genetic breeding, was sufficiently unique that they did not have a `market value' on a `determinable value' test. This question would of course require a factual inquiry that has not, in terms, been undertaken."

1319. In GE Capital Australia v Davis[72] Bryson J adopted and amplified Spigelman CJ's analysis in the following terms[73]:

"In my opinion which of paragraphs (a) and (b) is applicable depends on the degree of certainty with which value is ascertainable by reference to events in the market. Ascertainability can have various degrees of certainty by reference to events in a market, including the definite value referred to by Spigelman CJ, declining to the determinable value to which his Honour refers, and declining further by degrees, and the language of sub-s.420A(1) requires it to be understood that a degree of uncertainty can be reached at which there is not a market value and value is to be ascertained otherwise ... in the meaning of the words of the sub-section, a point is reached where market experience does not yield a market value with a sufficient certainty to be used as an integer."

1323. Bryson J concluded that the products in the case before him "had such special characteristics of use, location, age, history and adaptation that they did not have a market value in the sense employed."[74]

1326. The facts of the present case expose a related uncertainty which arises from the terms of s.420A. Section 420A(1)(a) imposes, in terms, a duty to take all reasonable care to obtain not less than market value for the property. The obligation is not qualified by an express reference to the costs associated with, or risks involved in, obtaining "not less than market value". In contrast, s.420A (1)(b) imposes an obligation to sell for "the best price that is reasonably obtainable, having regard to the circumstance existing when the property is sold." (Emphasis added.) The reference to the "circumstances existing when the property is sold" permits or invites consideration of associated costs and risks.

1329. While s.420A imposes a higher statutory duty upon controllers in the exercise of the power of sale and was clearly intended to confer additional protection upon the corporate mortgagor, there is nothing in the legislative history to indicate that it was intended to overturn the receiver's paramount duty to the secured creditor.

1332. Therefore, although on one, literal reading, s.420A (1)(a), could impose a duty to obtain "market value" irrespective of the associated costs and risks, the obligation to sell for market value is prefaced by the general requirement to take "all reasonable care" which, in my opinion, permits such matters to be taken into account.

1336. A breach of s.420A is not established merely because market value (where it exists) or the best price reasonably obtainable is not achieved. Rather, a breach of s.420A requires, in terms, a failure by the receiver to take all reasonable care to sell the property for not less than market value or the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.

1339. It is necessary for the Court to determine whether the property has a market value in order to determine which limb of s.420A(1) to apply.

1342. In Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd Campbell J stated[75]:

"In deciding whether there has been a breach of section 420A, a court looks at the process that a controller of property of a corporation has gone through in selling that property. The enquiry is whether, in the course of that process, the controller has taken all reasonable care to sell the property for not less than its market value. It is not necessary to prove that the property was in fact sold for less than its market value - a controller could breach section 420A, but, through luck, still manage to sell the property for its market value or more. Further, it is not necessary for me to find what actually was the market value of the property, to be able to find that section 420A(1)(a) was breached - all that I need find is that the process gone through was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be."

1346. In Ultimate Property Group Pty Ltd v Lord[76] Young CJ in Eq., while not questioning the significance of the process adopted by the receiver, doubted whether it was the sole determinant, as "unless it can be demonstrated ... that the property in fact sold for under the market price, it is merely a case of injuria sine damnum. If, as his Honour says, by luck, the market price is achieved, then the mortgagor has suffered no loss."[77]

1349. Such an outcome occurred in Kyuss Express Pty Ltd v Sellers[78] where Mandie J found that the receiver had breached s.420A, but awarded only nominal damages.

1352. As Professor O'Donovan has observed[79], s.420A(1)(a), at least, assumes that the receiver knows the market value of the property.

1355. In Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd[80] Campbell J held that the defendant mortgagee had breached its general law duties and the statutory duty under s 420A of the Corporations Act in exercising a power of sale by conducting an auction of the security property.

1358. The plaintiff was a subsequent encumbrancer of real property which, after the debtor company's default, was sold at public auction by the first registered mortgagee.

1361. The property was originally to be auctioned on 30 August 2001. Signboarding was erected, advertisements were placed in national newspapers and a mail out to over 500 potential purchasers was conducted. Information memoranda and copies of the contract were sent to relevant inquirers. The defendant mortgagee was a corporation of which two solicitors, father and son, were directors and shareholders. Following the mortgagor's default, the father received offers for the property, including offers for $7 million and $9 million. The auction of the property was postponed to 13 September 2001. While the father was absent overseas his son handled the auction but was unaware of the prior offers. Despite the advice of the agent handling the auction, no additional advertising of the property took place. The signboards were not updated to show the new auction date and time. Shortly before the auction, a potential purchaser expressed a "serious" interest in buying the property, but the mortgagee took steps that had the inevitable consequence of keeping the potential purchaser away from the auction. Campbell J found that if the potential purchaser had attended the auction, he would have bid more than the amount of $6.6 million for which the property was sold.

1364. Campbell J concluded that, in the circumstances, the mortgagee took deliberate steps which it knew would result in a seriously interested potential bidder failing to attend the auction. That conduct constituted a reckless disregard of the interests of the mortgagor[81].

1367. In Jeogla v ANZ[82], the breach was constituted by the receiver's sale of specially-bred herds of cattle situated on two properties subject to the securities. The herds had had no significant importation of females for over a century and were, in effect, a unique "beef-generating machine" to which substantial science and refinement had been consistently applied.

1370. The cattle herds were sold to the purchasers of the respective mortgaged properties on which they were situated. The herd was sold pursuant to a right of first refusal at a predetermined price, which resulted in a certain price for per kilogram "live weight". That "live weight" price did not take into account the special breeding status of the cattle.

1373. Einstein J found that the cattle should not have been valued on the basis of a sale per kilogram of "live weight", but by reference to a dispersal sale, on a per head basis, with marketing directed at the breeding side of the cattle industry[83]. His Honour found that by selling on a per kilo basis, locked into the sale of land transaction, the receiver had conducted the sale on the basis of a misconceived estimate of value directed at the wrong market.

1376. Further, the receiver had failed to act in accordance with the advice he had received. Importantly, he had failed to attract prospective buyers whose presence was likely to have materially altered the course of events which took place at, and immediately after, the auction[84]. The advertising did not suggest that the cattle might be for sale separately from the land[85]. Only those prospective purchasers who had expressed an interest in the "real property auction received the very important information as to the price to be the subject of the right of first refusal"[86].

1379. His Honour accepted expert evidence that the price per kilo was not the real market value of the cattle and concluded[87]:

"In the result, for the reasons set out above, the plaintiffs have succeeded in establishing that in exercising the subject power of sale in respect of the cattle running on Hernani and Jeogla, the receiver failed to take all reasonable care to sell the cattle for not less than its market value. Hence, a breach of section 420A(1)(a) has been established. The particular matters which evidence the receiver's failure to take reasonable care to sell the cattle for not less than its market value have earlier been set out. Without seeking to repeat all of those matters or to be exhaustive, of particular significance amongst those matters are the receiver's failures:

(a) To take reasonable care to ensure that the property had been properly advertised, promoted or marketed in accordance with the advice which he had received.

(b) To give sufficiently early notice of critical matters concerning the Jeogla auction as would attract to the auction prospective buyers ...

(c) To address the correct market in seeking to identify and realise the market value ... ".

1386. In Kyuss Express Pty Ltd[88], the debtor company had acquired its business of manufacturing and retailing of upholstered furniture for commercial use from its founders, had who had become its employees. The company secured a significant contract to fit out serviced apartments ("the Walker contract") but could not obtain the necessary advances to fund that contract. Receivers were subsequently appointed.

1389. The Walker contract was the main asset of the business. The receivers formed the view that the Walker contract could not easily be assigned to a third party, because Walker was unlikely to be willing to continue with persons other than the founders. The company did not have the funds to complete the Walker contract. They therefore considered that it added little value.

1392. The receivers received a "without prejudice" letter from a company associated with the current director, offering to buy one third share of the company for $300,000, subject to finance and on certain conditions. They nevertheless sold the entire business to the founders for $120,000, together with their assumption of liability for employee entitlements.

1395. Mandie J applied s.420(1)(a) of the Companies Act 2001 and the principles of Spencer v The Commonwealth[89]. He was not satisfied, on the evidence, that the market value of the business exceeded the value of the sale to the founders, but held that the receiver had not had reasonable grounds to reach that conclusion at the time of the sale. His Honour found that the receivers breached their duty in failing to inquire of Walker whether or on what terms the benefit of the Walker contract might be passed on to a different purchaser, failing to investigate the bona fides and timing of the other offer and failing to negotiate to see whether a competitive bid would develop. Further, the receivers failed to advertise the sale of the business or call for tenders for its purchase, which would have established that there was no offer other or better than that of the founders.

1398. As Mandie J observed "Given the special value of the business to [the founders], the failure to adopt that procedure also eliminated any chance that [the founders] might be induced to increase their offer. Instead [the receiver] sold the business to the [the founders] with undue haste while failing to take those steps which receivers acting reasonably ought to have taken to protect the interests of Kyuss as contemplated by s 420A of the Law."[90]

1401. In Ultimate Property Group Pty Ltd v Lord[91], a corporate debtor and the guarantors brought proceedings pursuant to s.420A of the Corporations Act. The defendants were the mortgagee and the controller it had appointed. The controller sold the mortgaged land for a price which resulted in a shortfall, for which the guarantors were liable. The plaintiffs contended that the defendants had valued the land on the erroneous assumption that GST was payable on the rentals, which diminished the value of the reserve. They argued that the property should have been sold so as to avoid, legitimately, the GST.

1404. Young CJ in Eq did not accept that the defendants had, in any event, relied on the allegedly erroneous valuation in fixing the reserve. Further, he did not accept that the controller breached his duty in failing to avail himself of a margin scheme under GST legislation to avoid or reduce GST. While his Honour did not reject the possibility that in some circumstances, s.420A could impose an obligation to sell in a tax effective way, he considered that the controller had not failed to use all reasonable care in relation to the matter. The controller had taken unto account the prospect of using the relevant margin scheme, but considered that it would have made little or no difference, as the purchaser was interested in the net cost. He had also considered that there were additional costs involved in using the margin scheme.

1407. Young CJ in Eq considered that, in circumstances where the controller considered the question and rejected using the margin scheme for reasons which appeared to have logical force, no breach of duty was established.

1410. In GE Capital Australia v Davis[92] the guarantors of a loan made to associated corporations were sued for the unpaid balance of the debt, and cross-claimed on the basis, inter alia, that the security property (which was special purpose industrial plant and equipment) did not realise its value when sold at auction by the receiver. Bryson J found that the plant and equipment had no "market value" due to the dearth of comparable sales.

1413. Prior to the sale of the plant and equipment by the controller, a voluntary administrator had unsuccessfully attempted to sell the companies' business as a going concern. Whilst so doing, he made the availability of the plant and equipment widely known to the persons likely to be interested. There was no interest in the business as a going concern.

1416. His Honour found that the plant and equipment were best sold in situ in the factory, as it was difficult to dismount. The companies had defaulted on payment of rent under the lease of the factory, and a short extension was negotiated with the landlord to enable the sale to occur. The time frame was relatively short.

1419. Bryson J noted that[93] "there is a lack of reality about criticisms of the conduct of the auction which express or assume a requirement that more time should have been spent in canvassing a wider market overseas, advertising in overseas newspapers and trade journals, and endeavours to reach potential markets ... There simply was not time available to circulate information and advertise in trade magazines throughout the markets. Exigencies created by the failure of [the companies] and their not having paid their rent, limited severely the time available for approaching markets or preparing for an auction."

1422. His Honour further noted that no opposition, protest or resistance had been expressed by the debtor companies or the director about reliance on the relevant valuation or the timing and conduct of the auction[94].

1425. He concluded that there must have been fairly wide knowledge of the availability of the equipment, by the process of the "grape vine". Further, the defendant had incurred significant financial risks by its expenditure in connection with the auction and it was not "reasonably open to criticism for limiting the amount to what in fact was expended"[95].

1430. In my opinion, the special purpose stock in the present case was property which had no market value in the sense of that term in s.420A(1)(a). In terms of Spigelman CJ's analysis, amplified by Bryson J, it did not have a definite value "clearly and obviously established as a market price" or a sufficiently certain "determinable value" by reference to closely comparable sales or market experience. The Florgale Group stock was very specialised and there was no evidence of comparable sales which would permit market value to be readily determined. The property indisputably had a narrow or "niche" market.

1433. If, contrary to that view, the property had a market value, the question arises what that market value was. The only independent valuation of the stock was that performed by Taylor Lockwood on the basis of percentages which were applied by Quin to the stock inventory as at 31 October 1998.

1436. Whether s.420A(1)(a) or (b) applies, in my opinion, no breach of s.420A, the general law duty or s.232 of the Corporations Law, has been established. The plaintiffs have not established that the receiver failed to use all reasonable care to obtain market value, or the best price reasonably obtainable in the circumstances then existing.

1439. The expert evidence establishes that the exercise of all reasonable care by a receiver would entail a process of selecting the method of realising the highest net return, by considering the different available means of sale and weighing the prices likely to be achieved against the likely costs and expenses entailed and the relative risks of the various methods in all the circumstances. The process is informed by the objective of securing the best possible return for the secured creditor, subject to the obligations imposed by general law doctrines and s.420A. It necessarily involves the exercise of judgment, taking into account all the relevant variables and circumstances of the particular case. It does not depend on matters of price or revenue alone, or any single factor in isolation.

1442. In my opinion, the process of evaluating and balancing the competing costs and benefits and the associated risks of various methods of sale will not, in every case, require a formal comparative analysis or documented calculations. All will depend on the circumstances of the individual case, including the scale of the receivership, the value and nature of the property involved, the receiver's expertise in relation to the type of property, relevant expert advice, the advice or input of proprietors and staff, the trading history and marketing of the company, including during the receivership, and other relevant variables in a realistic commercial context.

1445. I am satisfied that, in the present case, Orders, in accordance with his consistent statements in written reports and correspondence to the NAB, pursued a policy of concluding sales of stock, including sales at a discount, during the trading on period of the receivership, while attempting to sell the business as a going concern. I am satisfied that he instructed that staff, including the Messrs Burnes, to seek orders and sales, including sales at a discount, that were cash flow positive. I am satisfied that a substantial number of sales occurred.

1448. I am satisfied that Orders offered John Burnes (and others) a commission to sell stock for a price in excess of auction value which Burnes accepted, although he made no sales. I am satisfied that as he testified, Orders relied on the directors' and staff's knowledge of the requirements of the customer base and expected the sales staff and the Messrs Burnes to make efforts to conclude sales to the existing customer base which were cash flow positive. Mr McVeigh agreed that it was appropriate to use the services of existing sales and marketing staff and to expect that former proprietors would bring sales opportunities of whom they were aware to the receiver's attention. Eleven customers who would have had an interest in purchasing particular stock gave evidence that they were not notified of the availability of stock, although three were significant customers, and several had personal contact with one of the Messrs Burnes. The evidence does not permit me to conclude whether the Messrs Burnes or other staff failed to contact or to offer stock to any customers who were likely purchasers of available stock, and if not, why not. There is no evidence that any particular stock required by the 11 customers was available.

1451. I have rejected the Messrs Burnes' testimony in relation to Mr Orders' alleged instructions and prohibitions. I am unable to conclude why, if prospective sales to customers were available, the Messrs Burnes would fail to pursue them. Equally, there is no evidence to suggest why Mr Orders would give instructions or orders contrary to, or designed to thwart, his repeatedly stated policy of selling to customers where possible and seeking sales which were cash flow positive. I am satisfied that upon deciding to close the business, Orders, as he testified, took into account the marketing experience and history of the trade-on period during the receivership, the time frames, likely costs and returns and other relevant circumstances. Consistently with the principles endorsed by all the receivers who gave evidence at trial, he weighed the costs and benefits of persisting with attempts to sell at a discount to the existing customer base, as opposed to auction. In the light of the history of sales, losses and other features of the trade-on period, he determined upon auction, but continued to attempt to sell to existing customers for a price above auction value up to the auction period.

1454. In my opinion, the plaintiffs have not established that the receiver breached his duty by failing to take all reasonable care in relation to the analytical process or the selection of the mode of realisation of the Florgale Group stock.

1458. On ceasing to trade on 25 November 1998, Orders determined to auction the stock. Both Orders and Quin contacted Taylor Lockwood and an auction date of 15 December 1998 was selected.

1461. The letter of Taylor Lockwood to Bird Cameron dated 30 November 1998 set out its commission and expenses. It recommended placing two advertisements in the Saturday Melbourne The Age on two successive Saturdays. The letter stated in relation to "catalogue, brochure and postage - to prepare print and post a brochure to client, using our Mailing List and supplemented by Florgale's customer list if required."

1464. A subsequent facsimile of Taylor Lockwood to Bird Cameron dated 2 December 1998 suggested that the auction strategy be varied by auctioning the stock and fabric separately from the plant and equipment.

1467. The plaintiffs complain, in relation to the conduct of the auction held on 15 December 1998, that the lots were prepared and composed in such a way as to be unattractive to existing customers and buyers of a corporate uniform wardrobe, because they did not include an assortment of sizes, styles and patterns suitable for purchasers of corporate uniforms. In particular, the bundles tended to contain garments of the same size. The plaintiffs allege that the Messrs Burnes warned that the composition of the auction lots was inappropriate, but that their warnings were disregarded.

1470. Messrs John and David Burnes and Mr Phillips gave evidence in relation to the auction and the preparation and composition of the auction lots.

1473. David Burnes testified that he observed some lots being assembled at the Florgale Group's premises for about 15 to 20 minutes. That was his only experience of what the auctioneers did. He did not attend the auction. David Burnes testified that he protested about the bundling to Quin. In his witness statement, he stated that although he did not recall Quin's response, Quin showed no interest. At trial, he stated that Quin responded that the auctioneers were professionals. He also asserted that he told Quin in early December 1998 that the stock should not be auctioned, but should be sold by approaching the existing customer base. Mr Quin denied that such conversations with David Burnes took place. Mr Quin was a consistent and credible witness, whose evidence I accept. Mr David Burnes' testimony related, in any event, to a very brief observation. He did not attend the auction, and was unable to say whether the bundles he had observed being assembled represented the lots sold at auction, or what proportion of lots contained assorted sizes. He was unable to say how many lots contained assortments of size, styles and patterns likely to appeal to corporate buyers, and how many did not.

1476. Mr Phillips testified that garments were arranged in Florgale's showroom on the racks according to size, in all of the styles, colours, fabrics and patterns. He testified that he observed some lots assembled by the auctioneer's staff which appeared to have been bundled up as they had been stored on the racks at Florgale's premises and, in consequence, contained garments which were all of one size, although in different styles and patterns. Mr Phillips did not observe the Taylor Lockwood staff putting the stock into bundles. Nor did he physically go through the individual items in the bundles he saw, or make any record of what they contained. Although concerned, he did nothing about it. There was no way in which to identify what he saw. He attended the auction for an hour and a half. Although many lots described in the catalogue included a range of sizes, Mr Phillips testified that he "didn't see them".

1479. Mr Phillips presented as an unimpressive witness who appeared unresponsive and whose recollection of the auction was not detailed. Mr Phillips' responses to cross-examination on the auction and whether lots contained assorted sizes were evasive. He ultimately stated in re-examination that he did not look at or inspect the lots sold on the day of auction, and did not see "anything about how they were bundled".

1482. John Burnes also gave evidence that he observed the auctioneer's staff bundling up stock in the order in which the garments were hung. He did not see the auctioneer's staff dealing with any styles specifically and not recall how many garments were in each lot. He testified that `some of the lots consisted of assorted patterns and assorted sizes. Sometimes only assorted patterns but the same size'.

"...I had observed the auctioneer's staff bundling the garments, I told David Quinn, [sic] in a personal conversation at Florgale's office, that due to the manner in which the garments were bundled for the auction, buyers would not be able to solely purchase the garments that made up their corporate wardrobe, and that they would be forced to buy a multitude of garments for which they had no use. He did not indicate that he accepted my advice".

1489. In his witness statement, John Burnes stated that Quin told him in mid November that Orders had decided to auction the stock and he responded that the stock should not be auctioned, but sold by approaching the customer base. Mr John Burnes conceded that he did not make any complaint to Orders, the NAB or the auctioneers about the proposed auction, either in writing or orally.

1492. He asserted that he also complained to Quin about the way in which garments were bundled up, stating that they would be unsuitable to a prospective purchaser of a corporate wardrobe. Mr Quin denied that alleged conversation occurred. I prefer his testimony.

1495. There is no evidence that anyone conducted a physical inspection or kept a detailed record or analysis of the contents of the lots sold at auction.

1498. The catalogue for the auction indicates that, contrary to the evidence of the witnesses for the plaintiffs, a considerable number of lots contained garments of assorted sizes. In any event, the complaint based on the alleged failure to prepare lots with a selection to appeal to purchasers of a corporate wardrobe depends, to some extent at least, on acceptance of the plaintiffs' submission that existing customers were the most likely buyers at auction and that lots should be made up to contain an assortment of garments aimed principally at attracting them. The receiver had formed the view that the existing customers were unlikely to be significant buyers at auction.

1501. In my opinion, the plaintiffs have not established that the sorting, bundling, composition and organising of the stock in lots for auction resulted in a significant number of lots containing only one size, or compiled in such a way as to be unattractive to prospective purchasers at auction. I am not satisfied that the assembly and composition of the auction lots constitutes the basis of any breach of duty by the receiver or is otherwise a valid ground of complaint.

1504. The plaintiffs also contended that the advertising of the auction was inadequate in that:

(i) newspaper advertising was not placed in newspapers in different states but was confined to two advertisements placed in `The Age', a Victorian newspaper, on Saturday, 5 December 1998 and Saturday, 12 December 1998. The plaintiffs contend that the Florgale Group conducted a national business and that newspaper advertisements should have been placed nationally.

(ii) The flyers (approximately 768) advertising the auction were sent by post only to business in Victoria, New South Wales and Queensland.

(iii) There was no evidence that the existing customers of the Florgale Group were notified or included in the mail-out, although Taylor Lockwood had recommended that a customer list supplement its mailing list, if required.

1510. The basis on which the plaintiffs assert that the Florgale Group's business was national in character, thus requiring newspaper advertisements in, and mail-outs to, all states, is based upon:

(a) the addresses of the agents, distributors and retail outlets in the Professional Uniforms catalogue, which included a number of addresses in states or territories outside Victoria, New South Wales and Queensland. The plaintiffs assert that, while some of those agents, distributors and outlets were in Victoria, they were a small proportion, relative to Victoria's size and economy;

(b) an estimate by Mr John Burnes, on the basis of a Florgale Group internal budget document prepared for the month to 30 September1998, which analysed total sales of $107,561. That analysis indicated that 22% of the sales were in Victoria, 32% in New South Wales and 20% in Queensland, with smaller percentages in the remaining States and the Northern Territory.

1516. Mr Burnes' estimate, being for a three month period only, is in my view an inadequate basis on which to establish that the Florgale Group conducted a national business across all states and territories to such an extent that advertising Australia-wide was reasonably required. The Quick Evaluation Report referred to the Florgale Group's estimated percentage of particular markets within Victoria (save for continence products, in which case the market referred to was not specified). The Quick Evaluation Report and the Pitcher Partners Information Memorandum did not establish that the Florgale Group's business was essentially national in character. The plaintiffs have not established that the Florgale Group's business was on a national scale, or that a sufficient proportion of sales of the stock to be auctioned would typically be made to buyers situated outside Victoria, to justify a conclusion that the receiver breached his duty in confining the newspaper advertising to Victoria, and the mail-out to Victoria, New South Wales and Queensland.

1519. Mr Sloan of Taylor Lockwood testified that 768 advertising flyers were sent out advertising the auction to `uniform businesses, clothing retailers, market buyers, clothing manufactures and other companies in Victoria, New South Wales and South Australia'. The estimate of the number of flyers was calculated by reference to postal charges. The exact number of flyers was unknown. The names of the businesses were obtained using the Yellow Pages for each state. The 11 purchaser witnesses who gave evidence at trial did not receive a flyer, although one testified to the receipt of an unidentified document advertising the auction.

1522. The auctioneers advised that the flyers could be supplemented by a customer list "if required". Only one of the 11 customer witnesses learned of the auction. The plaintiffs argued that the receiver should have individually notified the Florgale Group's entire customer base of the impending auction of stock. They contended that the computerised customer list could have been employed.

1525. Quin stated he did not provide a mailing list to the auctioneers, but communicated the names of six or eight people who had requested that they be advised of the auction date. Quin testified that in his view, customers generally did not wish to attend auctions and did not wish to hold large quantities of stock.

1528. Orders could not recall what consideration he gave to distributing the flyer to the Florgale Group customer list. He could not recall whether he gave the customer list to the auctioneer, but stated it would not be his normal practice to provide a full customer list to an auctioneer as, in his experience, customers normally do not attend auctions. Potentially interested customers should be individually contacted. Sending a notice by facsimile to the Florgale Group's 400 to 600 customers would entail cost and the staff time.

1531. Mr McVeigh testified that he would place reliance on an experienced auctioneer's recommendations as to who should receive notice of the auction. In his opinion, however, a receiver would not normally notify all the customer base of the auction sale but would ensure that the auctioneer notified the major clients.

1534. He conceded that where major interested parties had already been approached in relation to the possible sale of the business, the extent to which auction leaflets were distributed to potentially interested parties was ultimately a "matter of judgment". He agreed that a receiver would take the cost of compliance into account when assessing preparation or advertising recommended for the auction by third parties.

1537. McVeigh testified that he would not normally provide a full customer list to an auctioneer, because he would have contacted interested customers beforehand. Mr Sloan considered that the customer list would have been an advantage. He could not recall that it was supplied. However, he considered that "anyone within the clothing industry" was a target of advertising.

1540. Mr Wallace-Smith stated that if the receiver had not previously embarked on a strategy of selling the stock to customers at a discount, he would wish to ensure that customers of the business knew of the auction.

1543. The auctioneers did not, in terms, recommend that the mail-out should include a customer list, but left it to the judgment of the receiver, "if required". It appears that Orders did not, in the light of his general practice and the trading history, include it. In circumstances where a strategy of sales at a discount to customers had been adopted, I do not consider that the receiver's duty entailed the individual notification of customers or the inclusion of the customer list in the mail-out. In my opinion, in all the circumstances, the plaintiffs have not established a breach of duty in relation to the preparation and advertising for, or conduct of, the auction.

1548. The plaintiffs allege that the receiver's failure to accept immediately, or more promptly, an advantageous offer made by Yakka Pty Ltd to purchase Coles corporate uniform stock which was subsequently withdrawn, constituted a breach of duty.

1551. The relevant offer was made in the letter dated 17 November 1998 of Andrew Edgar of Yakka to Malcolm Orders. The letter was hand delivered to the Florgale Group premises at about 5.30pm on Friday 27 November 1998, after the business had been closed. David Quin brought the letter to John Burnes.

"Thank you for the opportunity of reviewing the information package relating to the Florgale/Professional Group of Companies together with the detail stock information provided by Mr. David Quinn. Yakka Pty. Ltd. has reviewed the available stock information and wishes to express a formal interest in the stock related to the Coles/Myer contract detailed in the stock status report of the 30th October 1998. on the basis that the stock still approximates the 7,228 units detailed in the report with a selling price value of $196,536, Yakka Pty. Ltd. Is prepared to place a formal offer of $100,000 subject to a physical inspection and goods being available for collection in good order and condition. This offer would be open until Friday, 4th December 1998 and would also include patterns which relate directly to the Coles/Myer styles. Fabrics directly related to the above goods would also be of interest and we request details of these. Following a review of other stock items, Yakka does not have an interest in these and is unable to make any form of offer".

1558. It is not disputed that the estimated auction value of the Coles stock was only $6,879. The Yakka offer for Coles stock therefore compared very favourably.

1561. Messrs John Burnes and Quin discussed the offer. There is a conflict of evidence on what was said.

1564. John Burnes' evidence was that he "immediately responded that I thought the offer was extraordinarily generous and should be accepted immediately, before it might be cancelled". Burnes testified that David Quin responded with words to the effect that if they were keen today they would be keen next week and he would get around to it in time. On Monday, 30 November 1998 at 4.44pm Yakka withdrew its offer.

1567. At trial, Quin denied that John Burnes told him that the Yakka offer should be accepted immediately. Although he could not recall the precise words, he asserted that Burnes merely indicated that "it's a good offer and it should be accepted."

1570. Quin did not recall saying that if Yakka were keen today, they would be keen next week. Quin testified that he was aware that an offer to purchase might be withdrawn at any time prior to acceptance, but had no reason to suspect that it would be withdrawn prior to the date stated in the letter. He testified that he believed that he had a week to consider the offer and that time was needed to consider it.

1573. In his witness statement, Quin stated that he `did not have sufficient time to consider the offer and confer with Mr Orders before it was withdrawn'. He could not recall whether he tried to, or did, contact Malcolm Orders on the Friday evening or Monday morning to discuss the offer. Quin stated that the necessary steps to be taken prior to acceptance were to contact Malcolm Orders and to confirm that the stock levels conformed to the requirements of the Yakka offer. He could not recall whether he commenced the process of checking stock levels.

1576. Quin was aware that the auction realisation value of the Coles stock was about $6,879. Orders had stated at the meeting on 24 November 1998 that if an offer was received from Yakka, he would `assess the offer and compare value against auction'. Orders and Quin testified that Quin did not have the authority unilaterally to conclude a transaction of the value of $100,000, but was required to refer to Orders. Orders could not recall whether he was informed of the Yakka offer on the night it was received, but if so, as was highly likely, he was not aware of any urgency.

1579. Orders testified was that he would have needed time to evaluate the offer, although he agreed that it was `a very good offer'. In particular, Orders did not know of whether all the specified Coles stock was still held and was in good physical condition, or which patterns or fabrics related to the goods. He was therefore not in a position to respond to the Yakka offer on the evening of 27 November 1998 or by the following Monday, prior to the withdrawal of the offer.

1582. The plaintiffs submitted that the Yakka offer was conditional only on quantity and physical inspection of the stock. Therefore, the plaintiffs argued that the expression of the offer as a `formal offer' subject only to physical inspection and availability for collection in good order would be binding on Yakka unless the physical condition of the stock were defective. The disparity between the offer price and the estimated auction value of the Coles stock invited a return facsimile accepting the offer.

1585. The defendants contended that the offer was conditional and could not be rendered binding by the unilateral act of the receiver. Mr Garde pointed out that the Yakka offer expressly related to the Coles stock "detailed in the stock status report as at 30 October 1998". The letter was received a month later, after some of the Florgale Group October 1998 stock (which may have included Coles stock) had been sold. He argued that any response offering a different quantity of stock would be a counter offer.

1588. Mr Wallace-Smith, the defendants' expert witness, stated that the practical commercial approach to a conditional but advantageous offer would be to take steps as soon as possible to satisfy the condition. In the case of the Yakka offer, he would have tried to get the prospective purchaser to undertake a physical inspection as soon as possible, and would go to the company's books and records as a good starting point to check that the relevant stock was available. He would then have tried to arrange a time for the prospective purchaser to view the stock, although the purchaser's cooperation would be necessary. He would not have relied on the statement that the offer was open until 4 December 1998.

1591. Mr Wallace-Smith testified that he would not have sent an immediate one-line facsimile accepting the Yakka offer, due to its conditional nature. Had there been no conditions, he might have sent an acceptance immediately.

1594. The defendants argued that in circumstances where the offer was subject to conditions, including the identity of the stock, physical inspection, and availability for collection in good order and condition, it was unrealistic to contend that the receiver was culpable for failing to accept, within the space of a single working day, an offer stated to be open for an entire week.

1597. The defendants further submitted that I should reject John Burnes' account of his conversation with Mr Quin in relation to the Yakka offer. Mr Burnes did not present as an impressive witness. In my opinion, given that at the time, there was no reason to suppose that the offer would be prematurely withdrawn, it is improbable that Mr Burnes would refer to the possibility of cancellation and insist on immediate action after the close of business on Friday evening.

1600. Had the receiver adopted the course advocated by the plaintiffs of transmitting an immediate acceptance late on the evening of 27 November 1998, the purported acceptance would not have been binding on Yakka had the specified stock been unavailable, the physical inspection proved unsatisfactory or the goods been unavailable for collection in good order. The receiver was not in a position to require the prospective purchaser to attend the premises and conclude the physical inspection immediately. Acceptance of the offer in the absence of ascertaining that all the specified stock was available and in good order, would, in my view, be imprudent.

1603. I am satisfied that Quin was required to consult Orders and obtain his authority to conclude a sale of the value in question. There was nothing to indicate that the Yakka offer was likely to be withdrawn within a short space of time. The scheduling of the physical inspection was not within the receiver's sole control. In my opinion, "reasonable care" on the part of the receiv in such circumstances would not require the receiver to send an acceptance immediately or to ascertain stock levels and take steps to arrange a physical inspection within the space of a single working day.

1606. In my opinion, the failure to accept the Yakka offer outside business hours on Friday 27 November or on Monday, prior to its withdrawal, did not constitute a breach of duty by the receiver.

1610. As I have found that there was no breach of s.420A or s.232 of the Corporations Law, it follows that the plaintiffs' claims that the NAB is liable on the basis that:

(a) the receiver was its agent for the purposes of the conduct which constituted a breach of duty;

(b) that the receiver, as an officer of the corporation, breached the duty to exercise reasonable skill and care in the exercise of his duty pursuant to s.232(4) of the Corporations Law and that the NAB was liable as a party knowingly involved in the breach pursuant to s.79 of the Corporations Law; and

(c) the NAB was liable as a party knowingly involved in the contravention, pursuant to s.79 of the Corporations Law;

must fail.

1616. Although the special agency relationship of the receiver to the mortgagor pursuant to a provision typically included in a debenture charge is "peculiar" or "special", it has been recognised as "real"[96]. In the present case, the debenture charge provided that the receiver, in the exercise of his powers, should "conform to the regulations and directions from time to time made and given by the bank." It also provided that the receiver would be the agent of the mortgagor. In such circumstances, the consequences of the "peculiar", but "real" agency will be displaced only if the mortgagee directs or interferes with the receiver's activities[97].

1619. Although the debenture charges in the present case conferred on the bank a power to direct the receiver, I have found that the NAB did not direct, instruct or interfere with the receiver's activities. Orders reported to the NAB and informed its officers of his views and plans. The NAB concurred in his recommendations and assented to sale, but did not instruct Orders, either generally or in particular, on his conduct of the receivership.

1622. Further, liability as a person knowingly involved in a breach of duty under s.232 requires a knowledge of "the essential facts constituting the particular contravention in question[98].

1625. The evidence establishes that the NAB was at all times informed, and apprehended, that the receiver would first attempt to sell stock to the customer base prior to sale by auction. Therefore, had the receiver breached his duty by failing to pursue that course, the NAB would not have had the requisite knowledge of the breach to render it liable for knowing involvement.

1629. By counterclaim the NAB seeks to apply the proceeds of a sale of the mortgaged properties, currently held in a trust account, to reduction of the Florgale Group's debt. It also seeks judgment against the plaintiff guarantors and mortgagors. The existence of the Florgale Group's debt and the validity of the guarantees and mortgages were not disputed. In my opinion, the NAB is entitled to the relief sought in the counterclaim.

1633. The plaintiffs allege that on or about November 1998, the receiver converted certain computer hardware and software held by Group Textile pursuant to a hire purchase agreement with Bridge Wholesale Corporation (Australia) Pty Ltd. The equipment was taken for storage, but different computer equipment was returned. The total amount paid on behalf of Group Textile to Bridge Wholesale between 25 November 1998 and 26 March 2001 was $16,336.00.

1636. The defendants admitted the conversion but submitted that damages should be limited to the value of the goods, which was less than the amount due under the hire purchase agreement. Relevant authority indicates that where the value of the goods is less than the amount outstanding under the hire purchase agreement, the element of further special damage will not be made out. In such circumstances, the conversion would not cause the plaintiffs' loss on the basis of the common sense test[99]. Damages should therefore be based on the value of the equipment.

1640. It follows that, in my opinion, the plaintiffs have failed to establish their claims. The relief sought by the second defendant and plaintiff by counterclaim should be granted.

[1] The second plaintiff was at all material times inactive and had no relevant assets.

[3] [1982] 1 WLR 1410.

[4] [1993] AC 295.

[5] [1981] HCA 70; (1983) 152 CLR 491 (judgment of Aikin, J.)

[6] [1912] HCA 9; (1912) 13 CLR 676.

[7] [1973] HCA 20; (1973) 129 CLR 477 at 493 - 506.

[8] [1912] HCA 9; (1912) 13 CLR 676.

[9] [1897] AC 180.

[10] [1906] HCA 26; (1906) 3 CLR 925.

[11] [1897] AC 180 at 185.

[12] (1912) 13 CLR 679 at 680.

[17] [1973] HCA 20; (1973) 129 CLR 477.

[21] [1981] HCA 70; [1983] 152 CLR 491 at 498.

[22] [1979] 2 NSWLR 820.

[23] (1978) 139 CLR 196.

[25] Report 45, General Insolvency Inquiry, 1988.

[27] Report 45, General Insolvency Inquiry, 1988.

[28] Although s.232 of the Corporations Law clearly applied to receivers, it is not clear that a receiver is an "officer" for the purposes of ss.180-184. See Ford's Principles of Corporations Law, looseleaf service, 25,145.

[29] Corporations Act 2001; s.1383, 1400, 1401. Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13; (2002) 40 ACSR 619 at 622-623 [10].

[30] There is a penalty of five penalty units for breach of s.420A pursuant to s.1311(2) and (5) of the Corporations Act 2001.

[31] [2002] NSWSC 1146.

[35] [1912] HCA 9; (1912) 13 CLR 676.

[36] [2002] NSWSC 1146 at [56]

[37] Westpac Banking Corporation v Kingland & Ors, 26 NSWLR 700; Healy v Cornish (1863) 3 SCR Eq 28; Bank of New South Wales v Taylor (1881) 2 LR (NSW) 118; Taylor v Bank of New South Wales (1886) 11 App Cas 596; Pearl v Deacon (1852) 24 Beavan 186 53 ER 28; Hancock v Williams (1942) 42 SR (NSW) 252; Williams v Frayne [1937] HCA 16; (1937) 58 CLR 710; Buckeridge v Mercantile Credits Limited [1981] HCA 62; (1981) 147 CLR 654.

[38] [1937] HCA 16; (1937) 58 CLR 710 at 738.

[39] [2002] NSWSC 1146 at [92].

[43] [1999] NSWSC 563.

[44] [2001] NSWSC 15 at [107].

[45] [2002] NSWSC 16.

[46] [2002] FCA 830 at [15].

[48] [2002] NSWSC 1146 at [65].

[50] Ibid, at [60-61]. See also Artistic Builders Pty Ltd v Elliott & Turnbill (Mortgages) Pty Ltd [2002] NSWSC 16 at [129-133].

[51] [2004] NSWSC 114.

[57] ALRC Report No. 45, 1988, Vol. 1, para 236.

[58] Draft s.R7, appendix, Discussion Paper.

[62] Explanatory Memorandum, clause 406.

[63] Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114 at [59-61].

[64] [2001] NSWSC 1046; (2001) 40 ACSR 149.

[65] [1999] NSWSC 563 at [418].

[67] [1907] HCA 82; (1907) 5 CLR 418.

[68] [2001] NSWCA 15; (2001) 37 ACSR 106 at [34].

[72] [2002] NSWSC 1146.

[75] [2002] NSWSC 16 at [126].

[76] [2004] NSWSC 114.

[78] [2001] VSC 10.

[79] O'Donovan, J. Company Receivers and Administrators, looseleaf service, [11, 2130].

[80] [2002] NSWSC 16.

[82] [1999] NSWSC 563.

[88] [2001] VSC 10.

[89] [1907] HCA 82; (1907) 5 CLR 418.

[90] [2001] VSC 10 at [101].

[91] [2004] NSWSC 114.

[92] [2002] NSWSC 1146.

[96] O'Callaghan v Custom Credit Corp Ltd (unreported, Supreme Court, Western Australia, 17 December, 1997).

[97] American Express International Banking Corp v Hurley [1985] 3 All ER 564.

[98] Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 AT 670.

[99] Garven v Ronald Motors Pty Ltd (1938) 32 QJPR 145; Mizza v McKay-Massey Harris Pty Ltd (1935) 37 WALR 87; Pacific Acceptance Corporation Ltd v Mirror Motors Pty Ltd [1961] SR(NSW) 548; Chubb Cash Ltd v John Crilley & Sons (a firm) [1983] 2 All ER 294; National Australia Bank Ltd v Nemur Varity Pty Ltd [2002] VSCA 18; [2002] 4 VR 252 at 365-366.